29 May 1995 Internal T.I. 9505526 - REVOCATION OF PENSION PLAN REGISTRATION

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:

Tax consequences on revocation of registered pension plan where plan established to benefit XXXXXXXXXX of a religious order who are not employees or officers of the order.

Position TAKEN:

Trust would be treated as an inter vivos trust for tax purposes but might be exempt from tax if integral part of religious order (order is a registered charity).

Reasons FOR POSITION TAKEN:

Trust to provide pension for non-employee, non-officer does not fit any of the specific definitions in the Act (e.g., EBP, RCA, SDA) and will be treated as an inter vivos trust and taxed accordingly.

			May 29, 1995

	HEADQUARTERS	HEADQUARTERS
	Registered Plans Division	P. Spice
	Stella Black	(613) 957-8953
	Director
	Attention:  Kevin Smith
			950552

Revocation of Pension Plan Registration

This is in reply to your memorandum of February 7, 1995, in which you ask us to determine the tax treatment to be accorded to amounts in and received out of a plan set up to provide benefits to individuals after they reach the age of 65 years. In particular, you refer to a plan for members of a religious order who, you have determined, are not employees or officers of the religious order, but for whom the religious order has contributed amounts in trust to be paid out in the future.

In our telephone conversation of May 24, 1995 (Smith/Spice), you indicated that the plan was established in XXXXXXXXXX as a trust to provide each XXXXXXXXXX of the religious order (the "Order") who reaches the age of 65 years a benefit of $XXXXXXXXXX a month. On the XXXXXXXXXX death, there are no further benefits. If the XXXXXXXXXX leaves the Order before reaching the age of 65, XXXXXXXXXX is not entitled to any benefits under the trust. You advised that there was no provision in the trust concerning a XXXXXXXXXX who was in receipt of a monthly benefit but who subsequently left the Order. The trust indenture refers to the plan as a "retirement plan" but you indicated that some of the XXXXXXXXXX worked outside the Order and were paid salary and wages by a third party and not by the Order. Some XXXXXXXXXX receive an allowance from the Order for the "charitable works" they undertake on behalf of the Order. The salary or wages and allowances have all been paid over to the Order in accordance with the XXXXXXXXXX vows of poverty. You could not confirm whether any of the XXXXXXXXXX filed returns which recorded these amounts as remuneration which amounts were off-set by a deduction under subsection 110(2) of the Act, or whether the XXXXXXXXXX did not file at all. The Order's representative advised you that the XXXXXXXXXX earnings were not considered insurable under the Unemployment Insurance Act, and were not considered pensionable earnings for the purposes of the Canada Pension Plan.

As you point out, a pension plan established for persons who are not employees or officers, cannot be registered under section 147.1 of the Income Tax Act (the "Act"). And although an unregistered pension plan is normally either a retirement compensation arrangement (RCA) or employee benefit plan (EBP), neither of these definitions apply to a plan which benefits individuals who are neither employees or officers.

Generally, pension benefits are provided as part of a compensation package and constitute part of remuneration. They are offered to employees in exchange for services rendered or to be rendered by the employees to an employer. In our view the existence of a pension plan is a factor which favours a finding that an employment relationship exists even in the absence of other remuneration.

The Department has long taken the position that where an employer pays an amount on the termination of services by an employee and no or little salary or wages was paid to the employee in previous years, the payment of the amount will be considered a payment of deferred salary. In these cases, we have no difficulty in concluding an employment relationship exists where the recipient of the monies has rendered services to the payer. To emphasize the point we are making, the fact that the XXXXXXXXXX were employed by third parties or were merely provided an "allowance" by the Order does not rule out the possibility of the existence of an employment relationship between the Order and each XXXXXXXXXX The status of the earnings under the Unemployment Insurance Act and the Canada Pension Plan is, likewise, not determinative of the issue under the Income Tax Act.

Notwithstanding the foregoing, if you are satisfied there is no employment relationship, the tax consequences must be determined on the basis that this is an inter vivos trust, and the trust will be taxable in accordance with the rules as set out in sections 104 through 108 of the Act unless it is exempt from tax under section 149 of the Act.

Although the trust was settled by a registered charity, the trust will not be exempt from tax as a registered charity unless it was established by the Order to fulfil one or more of the charity's purposes and can be considered an integral part of the Order. Alternatively, if the purpose of the trust is not within the mandate of the Order, the trust may require separate registration as a charity to be exempt from tax. Whether the trust qualifies for and requires a separate registration and whether such registration could be granted retroactively to the date of the trust's establishment are matters which must be determined by the Charities Division. The Charities Division is also responsible for determining if the diversion of assets by the registered charity to this trust has any effect on the Order's registered status.

We will not comment further on the tax consequences should it be found that the trust is not exempt from tax. Once you or the Charities Division has made such a finding, our Trusts Section would be pleased to advise you further in order to assist you in explaining the tax consequences to your client on the revocation of the trust's registration as a pension plan. A copy of the trust indenture, and confirmation respecting the continuation or winding-up of the trust and the respective rights of the Order and the XXXXXXXXXX to the property in the trust should accompany your enquiry. Note that we have recently provided an opinion to you (our file number 943259) concerning the status of a registered pension plan which has no employee beneficiaries. Our opinion that amounts paid out of the plan to the employer would be paragraph 56(1)(a) income to the employer would not apply in the case of a plan which was never a superannuation or pension fund or plan.

XXXXXXXXXX

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