12 July 1995 Internal T.I. 9517296 - REVOKE NONMEMBER RPP PLANS

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:

Would future amounts paid out of a revoked RPP to the employer be included in income under 56(1)(a)?

Position TAKEN:

Yes

Reasons FOR POSITION TAKEN:

Revoked RPP would retain trust status and the payments out of the trust would maintain its characterization as pension and superannuation payments.

			July 12, 1995

	HEADQUARTERS	HEADQUARTERS
	Registered Plans Division	M.P. Sarazin
	Stella Black	(613) 957-3499
	Director
				951729

Revocation of Registration of Inactive, No-Member Pension Plan

This is in reply to your memo of June 21, 1995 requesting our opinion on whether the recipient of funds from an unregistered pension plan (registration revoked because inactive pension plan no longer met the primary purpose test contained in paragraph 8502(a) of the Income Tax Regulations) would have to include the payment in income pursuant to paragraph 56(1)(a) of the Income Tax Act (the "Act").

Whether a revoked registered pension plan ("RPP") would be considered an inter vivos trust for purposes of the Act is a question of trust law.

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For discussion purposes, we will assume that a registered pension plan would become an inter vivos trust when its registration is revoked.

Where no amounts are paid in the year out of an inter vivos trust, the provisions of subsection 104(6) and 104(13) of the Act are relevant. Income earned in a trust in the year is either taxable in the trust or in the hands of the beneficiary to which the income is payable.

Whether an amount of income is payable to an employer from the pension plan in the year it is revoked depends on the terms of the trust and the application of subsection 104(24) of the Act. If the employer, as the sole beneficiary, has the right to enforce payment under the trust, then the amount would be considered payable in the year in accordance with subsection 104(24) of the Act. In this situation, the trust would be permitted a deduction for the amount of income earned in the year in accordance with paragraph 104(6)(c) of the Act and the corresponding amount of income would be included in the employer's income in the year in accordance with paragraph 104(13)(a) of the Act. If no amount is payable, income earned in the trust is taxed in the year as trust income.

When any amount is paid out of the trust, the whole amount is taxable as an amount of a "superannuation or pension benefit" in accordance with paragraph 56(1)(a) if the Act. The expression "superannuation or pension benefit" is defined in subsection 248(1) of the Act and includes any amount received out of or under a superannuation or pension fund or plan and, without restricting the generality of the foregoing, includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder (a) in accordance with the terms of the fund or plan, (b) resulting from an amendment to or modification of the fund or plan, or (c) resulting from the termination of the fund or plan. We are of the view that any payment from the inter vivos trust would continue to be considered a superannuation or pension benefit and, consequently, the payment would be included in the recipient's income under paragraph 56(1)(a) of the Act.

Where an amount is paid out of the revoked pension plan and is taxed under paragraph 56(1)(a) of the Act and includes an amount which was previously taxed in the employer's hands pursuant to paragraph 104(13)(a) of the Act, relief may be provided pursuant to subsection 4(4) of the Act with respect to that part previously taxed. Where the whole of the property is not received in one year, there may be a problem in tracing the portion which represents previously taxed income. You may wish to confer with T3 Assessing concerning the proper approach to taxation in these circumstances.

One approach would be to consider the first amounts out of the fund as contributions and earnings thereon from a pool representing pre-revocation amounts with no portion being considered previously taxed income. Only when the pre-revocation pool is exhausted should any amount be considered to represent a portion of the previously-taxed income.

Alternatively, a proportionate amount of the total received in the year should be considered previously-taxed income: on the basis of the proportion the total amount of contributions, the proportion of pre-revocation earnings on contributions, and the proportion of post-revocation earnings on contributions bear to the total value of the fund at the date of payment.

Where an amount is paid out of the revoked pension plan but was not previously taxed in the employer's hands, there is no relief from tax provided under the Act. Income previously taxed in the trust will be taxed again on receipt by the employer pursuant to paragraph 56(1)(a) of the Act.

We trust the above comments will be of assistance to you.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch