4 January 1999 External T.I. 980625A - PAYMENTS TO PARENT RE RPP

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: Can payments by a subsidiary to a parent for pension benefits provided to the sub's employees under an RPP be deductible where the RPP is in a surplus position?

Position: Not pursuant to paragraph 20(1) (q)

Reasons: The Act is clear that RPP payments must satisfy section 147.2 in order to be deductible. A participating employer can still contribute to an RPP where another participating employer is in a surplus position - see subparagraph 147.2(2) (a) (vi).

January 4, 1999

XXXXXXXXXX TAX SERVICES OFFICE HEADQUARTERS
XXXXXXXXXX M.P. Sarazin
Acting Director 952-9853

Attention: XXXXXXXXXX
980625

Payments by XXXXXXXXXX to XXXXXXXXXX

We are writing to you in respect the issues raised in the XXXXXXXXXX letter to you from XXXXXXXXXX which you forwarded to us for our comments. Further to this letter, a representative from each of XXXXXXXXXX met with us on XXXXXXXXXX to provide additional information. A copy of an agreement between XXXXXXXXXX on this topic was also provided to us and is attached to this memorandum for your information.

Relevant Facts

With effect from XXXXXXXXXX acquired a XXXXXXXXXX business that had previously been carried on by XXXXXXXXXX. After the sale XXXXXXXXXX owned approximately XXXXXXXXX % of the outstanding common shares of XXXXXXXXXX.

As part of the sale, employees of XXXXXXXXXX business were transferred to XXXXXXXXXX entered into an agreement to ensure that the employees transferred from XXXXXXXXXX to XXXXXXXXXX retained all of their benefit programs and coverage, including pension benefits.

The effect of the agreement for pension purposes was that the XXXXXXXXXX employees continued to be covered by XXXXXXXXXX registered pension plan ("RPP"). The XXXXXXXXXX representatives advised us that XXXXXXXXXX was added to the list of employers participating in the XXXXXXXXXX RPP. We have confirmed this fact with the Registered Plans Division.

XXXXXXXXXX has been making payments to XXXXXXXXXX (and not to the XXXXXXXXXX RPP) for the pension benefits accruing in respect of its employees. These payments arise pursuant to Appendix B of the aforementioned agreement,

The following is our understanding of the reasons for the payments by XXXXXXXXXX to XXXXXXXXXX (rather than to the XXXXXXXXXX RPP) as provided to us by the XXXXXXXXXX representatives. XXXXXXXXXX and XXXXXXXXXX believed that no payments could be made into the XXXXXXXXXX RPP, pursuant to the rule contained in paragraph 147.2(2)(d) of the Act, because the XXXXXXXXXX RPP was in a surplus position. Because the surplus in the XXXXXXXXXX RPP arose during the time that XXXXXXXXXX was the only participating employer, the surplus effectively belongs to XXXXXXXXXX. Since XXXXXXXXXX could not make payments into the XXXXXXXXXX RPP, it should not otherwise benefit from not making pension payments for its employees who continue to accrue benefits, particularly when the surplus belongs to XXXXXXXXXX (i.e. it was viewed that effectively XXXXXXXXXX was paying for the pension benefits accruing to the XXXXXXXXXX employees and that this cost should be borne by XXXXXXXXXXX). Thus, XXXXXXXXXX was required to make compensating benefits to XXXXXXXXXX, effectively in respect of the surplus in the XXXXXXXXXX RPP. As the payments result from serious business negotiations between XXXXXXXXXX and XXXXXXXXXX the payments represent legitimate business expenses that should be deductible under the general provisions of the Act.

Issue

Are the payments made by XXXXXXXXXX to XXXXXXXXXX, as described above, deductible by XXXXXXXXXX?

Analysis

It is clear that the amounts paid by XXXXXXXXXX to XXXXXXXXXX do not qualify for the deduction under paragraph 20(1)(q) of the Act as the payments do not qualify as payments permitted by subsection 147.2(1).

However, we believe the taxpayers erred in presuming that no payments could be made to the XXXXXXXXXX RPP by XXXXXXXXXX as subparagraph 147.2(2)(a)(vi) of the Act is applicable in situations where more than one employer is participating in a RPP. On that topic, we note that the Registered Plans Division Newsletter 95-3 dated May 12, 1995 states:

"2. Plans in which more than one employer participates.

If there is more than one employer participating in the plan, the valuation has to reflect the requirement under subparagraph 147.2(2)(a)(vi) of the Act that the assets and actuarial liabilities be allocated in a reasonable manner among the employers. As a consequence of the allocation, there may be an unfunded liability for employees of one employer at the same time as there is an actuarial surplus for employees of another employer who participates in the same plan."

In addition, the Department of Finance's technical notes on subparagraph 147.2(2)(a)(vi) state "this requirement is intended to serve two purposes: first, to ensure that the unfunded liability associated with an employer, and thus the employer's contributions in respect of that liability, are not excessive; and second, to require a reasonable determination of each employer's actuarial surplus for the purpose of the rule in paragraph 147.2(2)(d)".

The XXXXXXXXXX RPP should be evaluated in the context of subparagraph 147.2(2)(a)(vi) to determine if the XXXXXXXXXX portion of the plan is in a surplus position in order to determine whether XXXXXXXXXX is entitled to contribute to the XXXXXXXXXX RPP. Since the XXXXXXXXXX agreement does not provide XXXXXXXXXX with any rights to the surplus in the XXXXXXXXXX RPP, it is unlikely that the XXXXXXXXXX portion of the XXXXXXXXXX RPP was in a surplus position. If this is so, it follows that XXXXXXXXXX, as a participating employer, is not precluded by paragraph 147.2(2)(d) from contributing to the XXXXXXXXXX RPP in respect of the pension benefits earned by its employees.

Conclusion

We would not support a conclusion that the payments by XXXXXXXXXX to XXXXXXXXXX in respect of the pension benefits accrued under the XXXXXXXXXX RPP are deductible computing its business income under paragraph 20(1)(q). Further, in this fact situation, we would not view the payments by XXXXXXXXXX to XXXXXXXXXX as being laid out to earn income

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

We trust that the above comments will be helpful.

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

c.c John O'Meara
Registered Plans Division