30 November 1996 Ruling 9641733 - EMPLOYER TOP-UP OF RPP ACCOUNT

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:

1)Whether payments in respect of loss caused by bad investment by pension plan administrator can be used to top-up pension accounts of members without immediate tax consequences to members (including payer's liability for withholding);

2)whether such payments are deductible to employer; and

3)whether recovery from XXXXXXXXXX of over-payment to RPP because actual loss less than estimated loss at time of payment is income to employer.

Position:

1)Yes a) not a contribution to RPP under 147.2(1), b) not a contribution as described in Reg. 8301(4)(a)(i) or (ii), c) and no withholding required;

2)Yes;

3)Yes.

Reasons:

1)The payments are made by reason of the employer's role as administrator (employees have alleged a breach of the employer's -qua administrator's - fiduciary duty to invest RPP assets guaranteeing no loss) and not by reason of employment relationship - payments not being made by virtue of employment relationship or pursuant to RPP terms; section 153 doesn't require withholding on such payments.

2)Payments are laid out to earn income.

3)Any recovery from liquidator of overpayment made to RPP is income taxable under section 3.

XXXXXXXXXX							964173
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX, in which you request an advance income tax ruling on behalf of the above-named clients and further to your voice mail message of XXXXXXXXXX.

FACTS

1.The Company is a sponsor of the Pension Plan for Employees of XXXXXXXXXX and Affiliated Companies (the "Plan"). The Plan's registration number with Revenue Canada is XXXXXXXXXX. In accordance with the Plan terms the administrator of the Plan is the Company and any of its wholly owned or partially owned subsidiaries or associated companies including the Affiliate. The Company has been delegated the day-to-day administrative duties.

2.The Plan has both a defined benefit and a money purchase provision. The rulings requested herein relate only to the money purchase provision. The money purchase provision is optional. To encourage employees to contribute to the money purchase provision, the Company and the Affiliate match XXXXXXXXXX% of the employee contributions.

3.Prior to XXXXXXXXXX, the Plan was funded through XXXXXXXXXX. The assets held under the money purchase provision were invested in various investment vehicles offered XXXXXXXXXX, including guaranteed investment certificates ("GIC's") issued by XXXXXXXXXX, a pooled money market fund (the "Short-Term Fund") and other pooled funds. The rulings requested herein relate only to the GIC's and Short-Term Fund. The Short-Term Fund was invested with the general assets of XXXXXXXXXX and was therefore not a segregated fund. Members of the Plan chose the investments for their accounts from the selection of investment vehicles made available XXXXXXXXXX.

4. XXXXXXXXXX

5.XXXXXXXXXX members of the Plan who invested any part of their account balances under the Plan in XXXXXXXXXX GIC's or in units of the Short-Term Fund are expected to incur losses to the extent that the amounts invested exceed the amounts guaranteed by XXXXXXXXXX.

6. XXXXXXXXXX

7.In essence, the Union claims that the Company, as administrator of the Plan, failed to disclose to the employees that their investment accounts under the Plan were in any way at risk XXXXXXXXXX. The Union further claims that the Plan documentation indicates that the XXXXXXXXXX pooled funds were "guaranteed" and that the Company, as administrator of the Plan, is responsible for any shortfalls given its fiduciary obligations to the members under the Pension Benefits Standards Act (Canada) and the express "guarantee" with respect to the assets held in XXXXXXXXXX pooled funds. The Union has asked the Company for confirmation that the Company will fulfil the legal obligations to the Plan members as alleged, and enter into an arrangement with the members to ensure that no losses occur XXXXXXXXXX. The Union has also asked that the Company take prompt steps to resolve the matter so that the parties can avoid legal proceedings.

PROPOSED SPECIAL PAYMENTS

8.Although you feel that the Union's claims will ultimately be unsuccessful, the Company and, as confirmed in your voice mail message of XXXXXXXXXX, the Affiliate wish to avoid litigation in this matter. They are therefore prepared to make special payments to the Plan to settle all claims for compensation by members who were in employment with the Company or the Affiliate on the date the board of directors approved the proposed payments (XXXXXXXXXX) and who will suffer losses on the GIC's and Short-Term Fund units XXXXXXXXXX. There are approximately XXXXXXXXXX members in this category. The special payments will be made in the Company's and the Affiliate's role as administrator of the Plan, without admission of liability, to resolve any outstanding issues regarding the breach of their fiduciary obligations as administrator of the Plan. The special payments will be made in respect of such members regardless of whether they are represented by the Union. Members will have to sign a form of waiver and release to receive the payments.

9.The special payments will be in an amount equal to the losses incurred by members on the XXXXXXXXXX GIC's and Short-Term Fund.

The special payments will be made to the members' accounts in the Plan at the following times:

(a)for members who do not retire prior to XXXXXXXXXX, the special payments will be made after the XXXXXXXXXX and the quantum of the losses is known;

(b)for members who retire prior to XXXXXXXXXX, special payments equal to the estimated loss will be made at the time of the retirement. When XXXXXXXXXX and the quantum of the losses is known, any overpayments made to a member's account by the Company or the Affiliate will be recovered XXXXXXXXXX.

In calculating the special payments to the members' accounts an amount of interest will be credited from XXXXXXXXXX, to the date of payment at the same rate of interest as XXXXXXXXXX.

XXXXXXXXXX

XXXXXXXXXX

10.In the event of the member's death prior to the time for payment, the member's special payment will be made to the member's account in the Plan to enure to the benefit of the member's spouse, beneficiary or estate.

PURPOSE OF SPECIAL PAYMENTS

11.The special payments will be made in full settlement of the members' claims for any alleged breach of the Company's and the Affiliate's obligations as administrator of the Plan, but without any admission of liability on the part of either the Company or the Affiliate. Both the Company and the Affiliate are prepared to make their respective proposed special payments to minimize the Company's and the Affiliate's financial exposure and to resolve the lingering claims of the Plan's members. The special payments will also protect the Company's and Affiliate's reputations and avoid any negative media reports concerning the issue.

XXXXXXXXXX

OTHER INFORMATION

12.To the best of the Company's and the Affiliate's knowledge none of the issues involved in the advance ruling request are being considered by a taxation services office or taxation centre in connection with a tax return already filed, nor are any of the issues in question under objection with the Department.

13.The Company and the Affiliate are served by XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Centre.

RULINGS

Provided the above statement of facts and proposed special payments are accurate and constitute a complete disclosure of all the relevant facts and provided the special payments are completed as proposed, we rule as follows:

A.No amount of the special payments made to the Plan by either the Company or the Affiliate will constitute a contribution to the Plan within the meaning of paragraph 147.2(1)(a) of the Income Tax Act (the "Act") and no amount of the special payments will be deductible under paragraphs 147.2(1)(a) and 20(1)(q) of the Act.

B.No amount of the special payments made to the Plan by either the Company or the Affiliate will constitute a contribution under a money purchase provision of the Plan by the employer for purposes of either subparagraph 8301(4)(a)(i) or (ii) of the Income Tax Regulations, with the result that the proposed special payments will not be a contribution made in connection with the member's employment with the employer and will not cause a pension credit in respect of the members in question.

C.Provided the employee does not claim a deduction pursuant to paragraph 8(1)(m) and subsection 147.2(4) of the Act in respect of the special payments, the payment of a special payment to the Plan in respect of an employee or former employee will not give rise to income from employment under either section 5 or 6 of the Act, nor will such a payment give rise to income from any other source.

D.Neither the Company or the Affiliate will be required to withhold, pursuant to section 153 of the Act, any tax at source from the special payments made to the Plan.

E.The special payments paid by the Company and by the Affiliate to the Plan will be deductible by the payer in computation of its income in the year of payment pursuant to section 9 of the Act and any overpayment recovered by the Company or the Affiliate from XXXXXXXXXX will be included in the recipient's income for the year the overpayment is recovered pursuant to section 3 of the Act.

The above advance income tax rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada, and are binding upon Revenue Canada with respect to special payments made to the accounts of those members who agree on or before XXXXXXXXXX, to accept the special payments.

Yours truly,

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