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:
Is the payment of pension surplus to the Employer, acting as agent for the members of the pension plan, taxable in the members hands?
Position: Yes
Reasons:
The employer is receiving as agent for the member because the XXXXXXXXXX pension legislation will not allow its pension plans to pay out surplus to a member before the plan's termination.
XXXXXXXXXX 980063
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1998
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters 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 1follows:
1. XXXXXXXXXX (the "Company") was incorporated under the laws of the Province of XXXXXXXXXX. The Company is a Canadian-controlled private corporation resident in Canada for the purposes of the Income Tax Act (the "Act"). The company has operations throughout XXXXXXXXXX. "Canadian-controlled private corporation" has the meaning assigned by subsection 125(7) of the Act.
2. The Company deals with the XXXXXXXXXX Tax Services Office and files its income tax returns with the XXXXXXXXXX Taxation Centre.
3. In the XXXXXXXXXX, the Company established the XXXXXXXXXX (the "Plan") for the benefit of its Canadian employees. The Plan is a registered pension plan for purposes of the Act and its registration number is XXXXXXXXXX. The members of the Plan (the "Members") are employed throughout XXXXXXXXXX, however, a large proportion of the Members reside and work in XXXXXXXXXX. Accordingly, while the Plan is subject to the pension standards legislation of each Province in which Members are employed, the Plan is also registered with the XXXXXXXXXX.
4. Prior to XXXXXXXXXX, the Plan was contributory and membership was optional. Beginning in XXXXXXXXXX, the Plan became non-contributory for eligible employees. An eligible employee is a person employed in Canada by the Company where the person
a) was a Member of the Plan on XXXXXXXXXX and has elected to remain a Member of the Plan;
b) was not a Member of the Plan as of XXXXXXXXXX but has elected to become a Member in accordance with the membership conditions set out in Article XXXXXXXXXX of the Plan; or
c) has commenced employment with the Company after XXXXXXXXXX and, in the case of a full-time employee, has completed one full year of continuous employment and, in the case of a part-time employee, has completed two full years of continuous employment.
5. Over the past several years, the Plan has accumulated a surplus in excess of what is required to fund its obligations to its Members (the "Surplus"). The actuaries of the Plan have determined the amount of Surplus to be approximately $XXXXXXXXXX. As a result of the Surplus, the Company has not been able to make contributions to the Plan for several years.
6. The Plan does not presently provide for the withdrawal of Surplus assets by either the Company or the Members prior to the Plan's termination. In addition, the XXXXXXXXXX has advised the Company that, under the XXXXXXXXXX, lump sum cash payments cannot be made directly from the Plan to a Member in respect of any surplus distribution from the Plan. Any lump sum cash payments will have to be effected by paying such amounts to the Company in accordance with the XXXXXXXXXX surplus refund procedures. However, the XXXXXXXXXX has indicated that there would be no objection to the Company receiving a lump sum cash payment as agent for the Members.
Proposed Transactions
7. The company will ask the Members of the Plan to enter into a surplus sharing agreement (the "Agreement"). The Agreement will provide for the following:
a) The Members and the Company agree to amend the terms of the Plan to provide that the Members will be entitled to XXXXXXXXXX of the Surplus that existed as of XXXXXXXXXX and the Company will be entitled to the balance of the Surplus that existed as of XXXXXXXXXX and all of the future accumulating Surplus that may exist in the Plan.
b) Members will be asked to elect to receive their share of the Surplus either
i) by way of a lump sum cash payment; or
ii) in the form of increased pension benefits to the extent permitted under the Act and Income Tax Regulations plus any remaining balance, if any, in a lump sum cash payment.
In any case, the terms of the Plan will be amended to provide for the lump sum cash payment and the permitted increased benefits.
c) Once the Regulatory Authorities have approved the changes to the Plan and the payment of the Surplus, the Plan will make a payment to the Company, as agent for its Members that have elected to receive a lump sum cash payment, equal to the total lump sum cash payments, net of any withholding taxes, that would have been paid by the Plan to its Members if the payment was allowed under the XXXXXXXXXX. Immediately thereafter, the Company will make the required payments (which will already be computed net of the applicable withholding taxes) to the Members in respect of whom it had received the payment, as agent, from the Plan.
d) The Plan will remit the applicable withholding taxes. The Plan will report the Surplus payment as pension income received by the Members in the year.
e) The Company's share of the Surplus will remain in the Plan.
f) The Agreement will only become legally effective when sufficient consents are received from the Members of the Plan. If sufficient consents are not received then the Company will not proceed with the remaining proposed transactions.
8. Once the Agreement is approved by all of the Members of the Plan, the Company will seek approval from the Regulatory Authorities for the changes to the Plan and the payment of the Surplus.
9. Once the Regulatory Authorities have approved the changes to the Plan and the payment of the Surplus, in accordance with the Agreement, then the Plan will make the lump sum payment, net of applicable withholdings, to the Company, as agent for the Members that have elected to receive a lump sum cash payment. The Plan will report the amount paid as income to each Member that has elected to receive all or part of his or her entitlements in the form of a lump sum cash payment.
10. Immediately thereafter, the Company or its payroll agent will make the appropriate payment to each Member that has elected to receive a lump sum cash payment. The Company will not deduct these amounts paid by it or its payroll agent to the Members in computing its income.
Purpose of the Proposed Transactions
11. The purpose of the proposed transactions is to establish the rights to the Surplus that has and continues to accumulate in the Plan.
12. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this ruling request is being considered by a tax services office or taxation centre in connection with an income tax return already filed, and none of the issues is under objection or appeal.
Rulings Given
Provided that the statement of facts and proposed transactions are correct and constitute a complete disclosure of all the relevant facts and proposed transactions, and the terms of the Agreement are as set out in your submissions, we rule as follows:
A. The gross amount of the Surplus paid by the Plan, as described in paragraph 9 above, to the Company, acting as agent for the Members of the Plan, will not be included by the Company in its income under paragraph 56(1)(a) of the Act.
B. The gross amount of the Surplus paid by the Plan, as described in paragraph 9 above, and immediately thereafter paid by the Company or its payroll agent to the members, as described in paragraph 10 above, will be included as pension income under paragraph 56(1)(a) of the Act in the particular Member's income in the year that the payment is made to the Company, as agent for the Member.
The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided that the proposed transactions are completed within six months of the date of this letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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