16 April 1997 Internal T.I. 9704046 - CHARITY SUPPORTING ITS IMPOVERISHED FORMER EMPLOYEES

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:

payment to retired XXXXXXXXXX by former employer as pension or as social assistance

Position:

pension

Reasons:

while the annual payments are based on the need of the recipients, benefits are only payable to retired employees of the employer

		April 17, 1997
	Vancouver Island Tax	HEADQUARTERS
	 Services Office		A. Humenuk
		957-8953
	Attention: Dan McGrath, Manager
	           Communications Division
		970404

XXXXXXXXXX - Pension income or Social Assistance

We are replying to your memorandum of May 2, 1996 to Charities Division, which was forwarded to us on June 11, 1996, in which you asked about the nature of certain payments made by XXXXXXXXXX to its former employees upon their retirement. We apologize for the delay in our response.

XXXXXXXXXX is a religious charitable organization which

XXXXXXXXXX

It is our understanding that the maximum total benefits available to a particular member is based on a formula related to the fund raising efforts of that member while employed.

The central question is whether the payments made by XXXXXXXXXX to qualifying individuals upon their retirement from employment can be regarded as pension payments or as non-taxable social assistance payments (on the basis that paragraphs 56(1)(u) and 110(1)(f) apply).

For taxation years before XXXXXXXXXX reported the amount paid as pension. Starting in XXXXXXXXXX ceased reporting the amounts as pension, presumably based on a letter written by this Directorate dated February 14, 1978 to a similar type of organization, XXXXXXXXXX That letter was based on an interpretation of paragraph 81(1)(j) which was repealed for 1982 and later years. In a July 11, 1996 letter addressed to this Directorate, XXXXXXXXXX based their view that the payments were social assistance, and not pension, on the fact that a former employee's entitlement is based on need and that the individuals in receipt of funds have no pre-determined entitlement to an amount. Their arguments as to why the payments should not be taxed as pension income seem to rest primarily on the fact that there is no formal pension plan setting out the terms under which the payments are made. Consequently, the recipients must apply to XXXXXXXXXX annually, demonstrating the need for financial assistance.

The definition of "superannuation or pension benefit" in subsection 248(1) of the Act includes "any amount received out of or under a superannuation fund or plan...." but does not limit pension benefits to such amounts. The term "pension" has been considered judicially in Clarke v Clarke (1990) 2 S.C.R. 795, M.N.R. v Eastern Abattoirs Ltd. 63 DTC 1023 and R. v Burke 76 DTC 6075, among others. In its ordinary meaning, a pension is a payment to be made to a person by the person's former employer or by a government authority in consideration of past services. It follows that a pension plan is a plan or arrangement to provide such a pension. Based on our understanding that the applications for assistance under this arrangement are restricted to individuals who have retired from active duty as employees XXXXXXXXXX, it is our opinion that the payments are made in recognition of the individual's past service to XXXXXXXXXX.

The fact that the amount received by a member is determined annually and may vary according to the funds available and the amount of other income received by a member, is not relevant for the purpose of determining the nature of the payments. From the application form that is filled out by the employees, which was submitted with their letter of July 11, 1996, it appears that the only other income sources relevant to the analysis of need is the amount received under the Canada Pension Plan and Old Age Security. Integration of a pension plan with Canada Pension Plan is not uncommon, as evidenced by the pension plan governed by the Public Service Superannuation Act.

In view of the fact that an amount is included in income under 56(1)(u) only when it is not otherwise required to be included in income and, based on our opinion that these are pension payments, it is our view that the payments by XXXXXXXXXX to its retired employees are included in income under paragraph 56(1)(a) as pension income.

John F. Oulton
Section Chief
Business, Property & Employment Section
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c. Carl Juneau, Acting Director
Charities Division