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:
Are amounts received by employees on the settlement of litigation pertaining to the entitlement to certain pension funds taxable.
Position:
Yes.
Reasons:
The provisions of subsection 56(1) of the Act will apply to the amounts to be paid
XXXXXXXXXX 990107
Attention: XXXXXXXXXX
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letters and facsimiles of XXXXXXXXXX in respect of the above noted advance income tax ruling.
Definitions and Abbreviations
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof;
(b) "Agent" means the XXXXXXXXXX;
(c) "Allocation Methodology" means the allocation methodology established by XXXXXXXXXX for the purpose of distributing the Settlement Amount as described in 21 below;
(d) "Employer" XXXXXXXXXX;
(e) "Pension Plan" means the pension plan generally identified as the Pension Plan for the Employees of XXXXXXXXXX as created by the Employer for its employees effective XXXXXXXXXX and governed by a Trust Agreement and Pension Plan document as amended from time to time. At all material times the Pension Plan has been registered with Revenue Canada for the purposes of the Income Tax Act with registration number XXXXXXXXXX;
(f) "Plaintiffs"
XXXXXXXXXX
XXXXXXXXXX
(g) "RRSP" means a registered retirement savings plan;
(h) "Superintendent" means the XXXXXXXXXX Superintendent of Pensions; and
(i) "Trustee" means the XXXXXXXXXX
Facts
1. The facts surrounding the Action, and the events leading up to the Action, are set out in the Draft Agreement As to Facts (the "Agreement") attached as Schedule "C" to your request. This Agreement has been agreed to by counsel in the Action and, as such, may be considered as an authoritative source of facts for this ruling. A summary of the material facts set out in the Agreement are as follows:
The Action
2. On January 21, 1980, Revenue Canada issued Information Circular IC 72-13R6 entitled Employee's Pension Plans which included a requirement that on termination of a pension plan, any surplus in the plan in excess of certain maximum prescribed pension limits must be refunded to the plan contributor. (IC 72-13R6, subparagraph 16(c)).
3. In light of IC 72-13R6, the Employer amended the terms of the Pension Plan in XXXXXXXXXX to comply with Revenue Canada's policy, without notice to the Plaintiffs.
4. The Employer closed XXXXXXXXXX and laid off some of its employees. This prompted the Superintendent to rule that the layoffs constituted a partial termination under the specific provisions of the Pension Plan. The Superintendent required that all laid off employees be fully vested, whether vested or not.
5. In XXXXXXXXXX the accumulated funds in the Pension Plan, including investment earnings, exceeded the actuarial liabilities by approximately $XXXXXXXXXX. The Employer sought and obtained the approval of the Superintendent for payment of some of the surplus funds from the Pension Plan. In XXXXXXXXXX was paid from the Pension Plan to the Employer by the Trustee. This $XXXXXXXXXX was included in the Employer's income for its taxation year ended XXXXXXXXXX.
6. As part of the termination described in 4 above, all laid-off employees of the Employer were provided with three options with respect to the Pension Plan:
a) to receive deferred pensions payable by the Employer out of the Pension Plan at retirement age;
b) to receive an early retirement pension paid by the Employer out of the Pension Plan actuarially reduced as applicable for commencement before 65 years of age if eligible under the plan; and
c) to withdraw and transfer as a lump sum to a locked-in RRSP, the cash equivalent of the deferred pension benefits of the employee under the Pension Plan.
7. For the purpose of calculating amounts payable in accordance with the three options, the pension benefits of all Pension Plan members who were laid off were increased to the maximum amount permitted in accordance with the guidelines applicable at that time for registered pension plans.
8. In XXXXXXXXXX the Employer closed down additional XXXXXXXXXX, again laid off some of its employees and the Superintendent again declared a partial termination of the Pension Plan. The Employer offered the same three options referred to in 6 above to all terminated employees. For the purpose of calculating amounts payable in accordance with the three options, the pension benefits of all Pension Plan members who were laid off were increased to the maximum amount permitted in accordance with the guidelines applicable at that time for registered pension plans.
9. The Plaintiffs commenced the Action in XXXXXXXXXX on the basis that, inter alia, the Employer had received surplus funds from a trust fund created pursuant to the Pension Plan and that the Employer's receipt of these surplus funds was as a result of its involvement in a breach of trust by the Trustee of the Pension Plan, a further defendant in the Action. A copy of the pertinent pleadings in the Action were attached as Schedule "D" to your request.
10. The Plaintiffs alleged in the Action that the Employer unlawfully breached the terms of a trust agreement and documentation governing the Pension Plan, by removing $XXXXXXXXXX of surplus funds from the Pension Plan in XXXXXXXXXX.
11. The Action claimed inter alia, for judgment of $XXXXXXXXXX, plus interest at the rate of return earned on Pension Plan investments from XXXXXXXXXX, or, alternatively, pursuant to the Judgment Interest Act. To XXXXXXXXXX, these claims equated to approximately
$XXXXXXXXXX and $XXXXXXXXXX, respectively. In addition, the Action claimed against specific Defendants, inter alia, an accounting of all payments made out of the Pension Plan, judgment for all amounts paid out to any person other than a participant of the Pension Plan, a declaration that the Pension Plan had been terminated, or partially terminated, directions for determining entitlement of participants to the Pension Plan and the manner of distribution of the Pension Plan to participants.
12. The Employer defended the Action on the basis that, inter alia, the removal of $XXXXXXXXXX from the Pension Plan was entirely within its right and that the removal of these surplus funds was authorized both under the amended Pension Plan and by the Superintendent who approved all Pension Plan amendments and the actual payment of the $XXXXXXXXXX surplus.
13. In addition, the Employer claimed in its defense that the Plaintiffs, as part of the layoffs in XXXXXXXXXX and XXXXXXXXXX, had executed forms that conclusively determined their rights to a pension for service to the date of employment termination, thus precluding the Plaintiffs from advancing any claim to the surplus funds in the Pension Plan.
14. The Plaintiffs claimed that the extensive layoffs in XXXXXXXXXX and XXXXXXXXXX constituted a partial termination of the Pension Plan, entitling participants to a share of the accumulated funds and investment earnings in excess of actuarial liabilities. The Employer denied that the Plaintiffs had any right to receive amounts on any partial termination of the Pension Plan.
15. The initial trust agreement and Pension Plan documents provided that all monies contributed to the Pension Plan would remain for the benefit of the participants and on termination all funds would be distributed to the participants in accordance with their interests in the Pension Plan.
16. The Superintendent approved all of the amendments to the trust agreement and Pension Plan documents, and also approved the payment of those funds from the Pension Plan that were actuarially determined to be surplus.
17. Based on the actuarial value of the accrued defined benefits owing to the Pension Plan participants, the Employer made its required contributions to the Pension Plan from XXXXXXXXXX until XXXXXXXXXX. From XXXXXXXXXX to date, the actuarial liabilities of the Pension Plan have been funded from accumulated funds and investment earnings.
18. All voluntary contributions made at any time to the Pension Plan by members, together with all interest accrued on such additional voluntary contributions under the provisions of the Pension Plan in force from time to time, have been withdrawn. As of XXXXXXXXXX there were no voluntary contributions remaining in the Pension Plan.
The Settlement
19. The Action was set to proceed to trial for XXXXXXXXXX but was adjourned to allow for settlement negotiations. A negotiated settlement agreement dated XXXXXXXXXX, among the parties under the letterhead of XXXXXXXXXX (the "Settlement") was reached. A copy of the Settlement was attached to your submission.
20. The Settlement provides, inter alia, that the Employer will agree to pay an all inclusive settlement amount of $XXXXXXXXXX plus interest from XXXXXXXXXX, (the "Settlement Amount") to the Plaintiffs and the individual members of the classes they represent. To fund the $XXXXXXXXXX payment the Employer will pay the sum of $XXXXXXXXXX plus any interest payable thereon from XXXXXXXXXX, from its own funds. The balance of $XXXXXXXXXX plus any interest payable thereon from XXXXXXXXXX, will be paid, at the direction of the Employer, from the accumulated funds currently held in the Pension Plan which exceed the actuarial liabilities of the Pension Plan.
21. The Employer and the Agent will enter into an Agency Agreement in furtherance of the Settlement and any Court order such that the Agent shall act as agent for the Employer for the purpose of receiving and administering the Settlement Amount. The Settlement Amounts will be held by the Agent in an account hereafter referred to as the "Plaintiffs' Trust Account". In so doing, the Agent may, without limiting the generality of the foregoing, retain such professional assistance as it deems necessary, receive the Settlement Amount, place the Settlement Amount in an income earning account(s), determine who the individual member Plaintiffs are, their location, their proportional entitlement to the Settlement Amount and the investment income earned thereon, the legal expenses, Court approved costs, the Settlement administrative costs and the amount of any required withholdings as required. Thereafter, pursuant to any order of the Court and the terms of the Agency Agreement, the funds held in the Plaintiffs' Trust Account will be paid by the Agent to the individual Plaintiffs.
22. The Settlement Amount will be paid to the Agent and applied first to the payment of legal costs, the costs of obtaining Court approval and administering the Settlement. The balance of the Settlement Amount will be distributed to the individual Plaintiffs according to a Court approved procedure. The proposed scheme of distribution is based on the Allocation Methodology which proposes a pro rata distribution of the Settlement Amounts to the Plaintiffs based on a calculation of the commuted value of each Plaintiffs' accrued pension benefit as of XXXXXXXXXX. A more detailed explanation of this Allocation Methodology was provided with your submission. However, the individual amounts allocated and paid from the Plaintiffs' Trust Account to or at the direction of the individual member of the Plaintiffs shall include a proportional allocation of the Settlement Amount and any income earned on the funds in the Plaintiffs Trust Account, less a proportional allocation of any payment of, or in respect of, legal or administrative costs of the Action and of obtaining Court approval and administering the Settlement Amount. The allocation of income and expenses shall be made in a similar manner, and using the same methodology as, the allocation of the Settlement in accordance with the Allocation Methodology provided.
23. The Settlement offer made by the Employer does not in any sense constitute an admission of either total or partial liability by the Employer or its shareholders with respect to any of the claims advanced by the Plaintiffs in the Action.
24. A condition of the Settlement is that the payment of the pro rata share of the Settlement proceeds to each of the Plaintiffs will constitute full and final release of any and all claims arising out of the Action. As such, on implementation of the Settlement the Plaintiffs will release all claims they may have for entitlement to the $XXXXXXXXXX paid to the Employer from the surplus funds in the Pension Plan in XXXXXXXXXX, in addition to any claims they may have to any current or future accumulated funds and investment earnings in excess of actuarial liabilities in the Pension Plan.
25. The Plaintiffs have agreed that the Employer is entitled to any present or future accumulated funds and investment earnings in excess of actuarial liabilities in the Pension Plan, and has the unfettered right to remove any such surplus funds from the Pension Plan at any time in the future and has the sole right to receive all such surplus funds from the Pension Plan on the final termination of the Pension Plan.
26. The Settlement also provides for an enhancement of the pension benefits of current participants in the Pension Plan by XXXXXXXXXX% of each employee's accrued pension benefit as ofXXXXXXXXXX. The estimated cost of providing this pension enhancement was $XXXXXXXXXX. These employees will also be required to agree that the Employer is entitled to keep and remove any accumulated funds and investment earnings in excess of actuarial liabilities in the Pension Plan on both an ongoing and final termination basis.
Proposed Transactions
27. The Employer and the Plaintiffs propose to fulfil the terms of the Settlement as described above.
Purpose of the Proposed Transactions
28. The purpose of the proposed transactions is to settle the Action between the Employer and the Plaintiffs and to provide for the distribution of surplus funds held in the Pension Plan.
29. To the best of your knowledge and that of the Employer and the Plaintiffs, the issues related to this request:
(a) have not previously been reported in the Employer's, the individual Plaintifs' or any related party's prior income tax returns;
(b) are not being considered by a tax services office in connection with any of the Employer's or any individual Plaintiffs' or any related party's prior income tax returns;
(c) are not under objection by the Employer or any individual Plaintiff or by any related person;
(d) are not before the courts or if a judgement has been issued, the time limit for appeal to a higher court has expired; and
(e) are not the subject of a ruling previously issued by this Directorate.
Rulings
Provided the above statement of facts and proposed transactions are accurate and constitute a complete disclosure of all relevant facts and provided the transactions are completed as proposed, we rule as follows:
A Any amount transferred to the Agent by the Trustee at the direction of the Employer and in accordance with paragraph 20 above, will be included in computing the income of the Employer pursuant to paragraph 56(1)(a) of the Act.
B. Subject to the provisions of subsection 78(4) of the Act, all amounts paid to the Plaintiffs (including any applicable withholding tax paid on behalf of the Plaintiffs by the Employer or the Agent) in accordance with the Settlement, as described in paragraph 22 above, (including any portion of the Settlement Amount paid directly by the Employer or by the Trustee from the Plan to the Agent at the direction of the Employer), will be deductible by the Employer pursuant to section 9 of the Act for the taxation year in which such amounts become payable to the individual beneficiaries.
C. All amounts paid by the Agent or the Employer for legal fees or administrative costs in accordance with the terms of the Settlement as described in paragraph 22 above will be deductible pursuant to section 9 of the Act, by the Employer in the year in which the costs are incurred by the Agent.
D. Any amounts paid by the Agent or the Employer to an individual in accordance with the terms of the Settlement, will be included in the individual's income in accordance with the provisions of 56(1)(a) of the Act in the year in which they are received by a Canadian resident recipient or under paragraph 212(1)(h) in the case of a non-resident recipient.
(For greater clarity and without limiting the generality of this ruling, the amount will include:
(i) any portion of the Settlement Amount that would be allocated to each individual plaintiff in accordance with the Allocation Methodology if the gross amount of the Settlement Amount were allocated to the individual,
plus
(ii) any amount of interest or other amounts earned on the funds held by the Agent that would be allocated to the individual plaintiff in accordance with the Allocation Methodology if the gross amount of earnings were allocated to the individual
minus
(iii) any portion of the administrative costs, legal fees or other amounts charged against the amount held by the agent as provided in the Settlement that would be allocated to the individual plaintiff in accordance with the Allocation Methodology if the gross amount of such costs were allocated to the individual.)
E. No amounts held by the Agent shall be included in the income of an individual member of the Plaintiffs under the provisions of subsection 56(1)(a)(i) of the Act until such time as an amount is received by the individual in accordance with the terms of the Settlement.
For greater certainty, all amounts held by the Agent shall be treated during the time that such funds are held by the Agent as if such funds were held by the Employer. Accordingly the amounts will be subject to the normal reporting requirements of the Employer in computing the Employer's taxable income, income tax, interest or penalties required throughout the year or years during which the Plaintiffs' Trust Account is in existence.
In this fact situation, it is the opinion of the Revenue Collections Directorate, Trust Accounts Division of Revenue Canada that all withholding and remittance of income tax on amounts paid to the individuals described in ruling D above that are resident in Canada may be made in accordance with subsection 103(4) of the Income Tax Regulations.
For payees who are non-residents of Canada the amount withheld in accordance with subsection 212(1) of the Act shall be 25% of any amount paid, subject to any reduction permitted in accordance with and applicable tax treaty.
This letter does not express or imply, and should not be construed as expressing or implying any ruling or opinion other than those specifically provided above.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada and are binding on Revenue Canada provided the proposed transactions are implemented on or before XXXXXXXXXX.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
9
.../cont'd
.../cont'd
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