1998 Ruling 9813933 - SURPLUS, CONSTRUCTIVE RECEIPT

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 contructive receipt exist where court has ruled that members of an RPP have right to the surplus?

Position: No

DOCUMENT REASONS: The members do not have any entitlements until court approves the distribution method to be used in respect of the surplus.

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xxxxxxxxxx 981393
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Attention: xxxxxxxxxx

xxxxxxxxxx, 1998

Dear Sirs:

Re: Advance Income Tax Ruling Request
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Salaried Employees' Pension P1an (the "P1an")

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX)

Our understanding of the facts and proposed transactions is as follows:

Facts

1. XXXXXXXXXX (the "Employer") is a private corporation and a taxable Canadian corporation for purposes of the Income Tax Act (the "Act") . The expressions private corporation and taxable Canadian corporation have the meanings assigned by subsection 89(1) of the Act.

The Employer's tax account number is xXXXXXXXXX. It files its tax returns with the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office

2. The Employer sponsored the Plan which was effectively wound up XXXXXXXxxx. The Plan was a contributory, defined benefit, final average earnings registered pension plan established for the Employer's salaried employees. However, the wind-up of the Plan is not yet complete as the surplus in the Plan has not been distributed. The Plan continues to be a registered pension plan and its registration number is XXXXXXXXXX.

3. Pursuant to the requirements of clause 7a(2)(c) of Ontario Regulation 708/87 under the Pension Benefits Act, R.S.O. 1990 (the "Ontario Regulations"), as that section read prior to December 18, 1991, the Employer applied to the Ontario Court of Justice (General Division) (the "Court") for a declaration that the Employer was entitled to any surplus remaining in the Plan upon its wind-up. The judgment of the Court (the "Judgment") was that the Plan members were entitled to the surplus.

4. The Employer filed its intention to appeal the Court's decision.

5. Subsequent to filing its intention to appeal the Court's decision, the Employer and a group of the Plan's members, represented by counsel (the "Represented Members"), agreed that it would be desirable to avoid further delay, costs and uncertainty associated with the pending appeal. As a result, the Employer and the Represented Members entered into a surplus sharing arrangement as set out in the Minutes of Settlement (the "Arrangement")

6. The Arrangement provides as follows:

(a) the Employer is entitled to retain $70,500 previously withdrawn from the Plan's surplus to cover its expenses that were related to the wind-up of the Plan and the distribution of the Plan's surplus

(b) the Represented Members are entitled to receive, out of the Plan's surplus, the full amount ($72,000) of their costs incurred in respect of the above Court application;

(c) the Employer is entitled to receive an amount of $90,000 out of the Plan's surplus;

(d) both the Employer and the Represented Members are entitled to have their reasonable legal and actuarial expenses, incurred to effect the final wind-up of the Plan and the distribution of the Plan's surplus, reimbursed out of the Plan's surplus; and

(e) the members of the Plan (the "Members") are entitled to receive the balance of the Plan's surplus, after the payment of the amounts described in (a), (b), (c) and (d) above
(the "Net Surplus")

7. The Employer and the Represented Members applied to the Court for a consent order (the "Consent Order") to vary the Judgment allowing the Plan to distribute the surplus in accordance with the Arrangement. The Court issued its Consent Order authorizing the variation of the Judgment on XXXXXXXXXX.

8. The Employer asked the Pension Commission of Ontario (the "Commission") to approve the proposed allocation of the Plan's surplus in accordance with the Arrangement. On XXXXXXXXXX, the Commission provided its approval, subject to the Employer satisfying the Commission that the Net Surplus has, in fact, been paid, purchased or otherwise provided to the Plan Members to its satisfaction.

9. Even though the Arrangement established the amount of Net Surplus to be distributed to the Plan's Members and the basis on which that Net Surplus is to be allocated between active members, deferred vested members and pensioners, it did not establish a method of distribution of such Net Surplus entitlements. The Arrangement did not address whether the surplus would be paid to the Plan Members in the form of benefit enhancements, a cash payment or a combination thereof. Consequently, the Employer and the Represented Members have not yet agreed on how the Plan is to distribute the Net Surplus to its Members

Proposed Transactions

10. The Employer proposes to enter into an agreement with the Represented Members to modify the Arrangement to provide for the following

(a) each Plan Member's Net Surplus entitlement (the "entitlement") will be used to improve the registered pension plan benefits but not to exceed the benefits permitted under the Act and Income Tax Reguzations; specifically, the entitlement will be used to increase the particular Member's pre-1990 lifetime retirement benefits, to provide the Member with an unreduced pension commencing on the date the Member would have attained age 60 and to index the Member's pensions to increases in the Consume Price Index (hereinafter collectively referred to as the "Enhanced Benefits");

(b) in respect of the Enhanced Benefits, the Plan Member will be provided with one of the following payment choices

(i) the option of

(A) having the Plan acquire an annuity from a life insurance company licensed to carry on business in Canada for the benefit of the particular Plan Member in substitution for the Member's Enhanced Benefits; or

(B) transferring the commuted value of the Enhanced Benefits to a locked-in retirement account or a Life Income for the benefit of the Plan Member;

(ii) the option of:

(A) having the Plan acquire an annuity from a life insurance company licensed to carry on business in Canada for the benefit of the particular Plan Member in substitution for the Member's Enhanced Benefits;

(B) transferring the commuted value of the Enhanced Benefits to a locked-in retirement account or a Life Income Fund for the benefit of the Plan Member; or

(C) receiving the commuted value of the Enhanced Benefits as a lump-sum cash payment, subject to the applicable withholding taxes; and

(c) each Plan Member will be given sixty (60) days, from the date of mailing of his or her notice, to elect the form in which they wish to have their Enhanced Benefits paid to them. Where no election is made within the sixty days, an annuity will be acquired from a life insurance company licensed to carry on business in Canada to provide the Member with the Enhanced Benefits under the Plan.

11. Provided the Represented Members agree to the proposed amendment to the Arrangement, the Employer will, after the allowed time period for receiving Member's elections has passed, apply to the Court for an order varying the Consent Order to provide for the proposed method of distributing the Plan's Net Surplus entitlements to the Plan's Members.

12. Once the Court approves the variation to the Consent Order, the Employer will file the Plan amendments incorporating the proposed Net Surplus distribution with all of the appropriate pension authorities and, subsequent to receiving the approval of the Registered Plans Division of Revenue Canada, the Pension Commission of Ontario and any other required authorities, the Plan will distribute the Net Surplus to its Members in accordance with their particular elections.

13. Once the distributions described in paragraph 12 are completed, the Employer will inform the Commission that the conditions described in paragraph 8 above have been satisfied in order that the Commission can approve its own order of consent and file it with the Court, as required under the Ontario Regulations.

Purpose of the Proposed Transactions

14. The purpose of the proposed transactions is to incorporate a method of distribution of the Plan's surplus to the Plan's Members on the wind-up of the Plan.

Additional Information

15. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for an advance income tax ruling:

(a) is in an earlier return of the Employer or of a person related to the Employer;

(b) is being considered by a tax services office or taxation centre in connection with a previously filed return of the Employer or of a person related to the Employer;

(c) is under objection by the Employer or by a person related to the Employer;

(d) is before the courts; or

(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described herein, our ruling is as follows:

A. Provided that the payment options described in subparagraphs 10(b)(i)(A) and 10(b)(ii)(A) above qualify under proposed subsection 147.4(1) of the Act and provided that the payment options described under subparagraphs 10(b)(i)(B) and 10(b)(ii)(B) above qualify under subsection 147.3(4) of the Act, all payments received by a Plan Member in respect of the Enhanced Benefits, under the options described in subparagraph 10(b) above, will be included in the income of the recipient in the year it is received as a superannuation or pension benefit pursuant to subparagraph 56(1)(a)(i) of the Act.

The above ruling, which is based on the Act in its present form and does not take into consideration any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed within six months of the date of this letter.

Comments

This letter does not express or imply, and should not be construed as expressing or implying, that any ruling, opinion, confirmation or approval is being given in respect of the proposed amendments to the Plan. This approval can only be given by the Registered Plans Division.

Yours truly,

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