9 June 1995 Internal T.I. 9515177 - LARGE CORPORATIONS TAX HEALTH WELFARE PLAN DEFERRED

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether or not amounts which are expended for accounting purposes in respect of a Health & Welfare Plan represent a reserve for Part I.3 tax purposes.

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

Where the amounts are contingent in nature.

			June 9, 1995

Toronto Centre Tax Services Headquarters
Office 453-1-3 Michèle Trotier
438 University, 8th Floor (613) 957-8953
Attention: Bruce Eagles
951517

Large Corporations Tax

This is a follow-up to the telephone conversation of June 7, 1995 between Michèle Trotier of our Directorate and Bruce Eagles of your office concerning the treatment for purposes of Part I.3 tax of certain amounts reflected on the balance sheet with respect to a Health & Welfare Plan of a Corporate Taxpayer ("Taxpayer").

Our understanding of the facts is as follows:

1.Prior to 1991 the Taxpayer provided its retired employees with a Health & Welfare Plan ("Plan") but had not established a trust in respect of the Plan. The Taxpayer was therefore not funding the Plan but was paying for the expenses under the Plan as they were incurred.

2.Prior to 1991 an actuarial determination was made by an outside actuarial firm and it was established that approximately $XXXXXXXXXX would be necessary to fund obligations of the Taxpayer in respect of its retired employees covered under the Plan.

3.Following this determination the Taxpayer set up for accounting purposes approximately $XXXXXXXXXX as a deferred charge in respect of such obligations, approximately $XXXXXXXXXX was set up in its 1989 taxation year and another $XXXXXXXXXX was set up in its 1990 taxation year. In each case these amounts were recorded as expenses for accounting purposes and therefore reduced the amount of the retained earnings otherwise reflected on the balance sheet at the end of each such taxation year for purposes of Part I.3 tax.

4.In 1991 the Taxpayer started to fund the above $XXXXXXXXXX and will do so over a number of years. The above deferred charge account is therefore being reduced over time.

5.The Taxpayer is not a financial institution.

You have requested our views as to whether or not the amounts which are reflected on the balance sheet as a deferred charge described above in respect of the Plan should be included in the calculation of the capital of the Taxpayer pursuant to paragraph 181.2(3)(b) of the Income Tax Act ("Act") as a reserve for each of the 1989 and 1990 taxation years.

You are of the view that based on the information available to you the above deferred charge is a contingency since there is no legal obligation of the Taxpayer to pay the deferred charge amount such that it should be included as a reserve pursuant to paragraph 181.2(3)(b) of the Act.

We agree that the above deferred charge in respect of the Plan should be included in the computation of the capital of the Taxpayer as a reserve pursuant to paragraph 181.2(3)(b) of the Act where it can be established that the Taxpayer does not have a legal obligation to pay the deferred charge amount such that it is of a contingent nature.

This can be distinguished from the situation where the unfunded pension liabilities of a corporate employer constitute a legal rather than a contingent obligation in which case they would not be reserves pursuant to paragraph 181.2(3)(b) of the Act. However, as a legal obligation would exist, where the liability is outstanding for more than 365 days it would be included in the computation of the capital of the corporation pursuant to paragraph 181.2(3)(f) of the Act as an other indebtedness of the corporation.

We hope that the above comments will be of assistance. If you require to discuss further please do not hesitate to contact Michèle Trotier at 613-957-3494.

F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch