7 June 2001 Internal T.I. 2001-0084037 - DEMUTUALIZATION BENEFITS AND RPP

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 treatment of a demutualization benefit received by a defined benefit RPP trust.

Position: Generally, if the RPP received a cash demutualization benefit, it is considered to have received a dividend pursuant to paragraph 139.1(4)(f). If the demutualization benefit consisted of shares, the shares would have a cost of nil pursuant to subsection 139.1(4). Such cash or shares would form part of the assets of the RPP in the determination of whether there is an actuarial surplus in the RPP.

Reasons: Legislation.

June 7, 2001

	Registered Plans Directorate	Income Tax Rulings
	Patricia Spice                 	  Directorate
	Acting Director	J. Leigh
	Policy and Communication Division	952-1505

Attention: Allan Robusky
2001-008403

Demutualization Benefits and RPPs

This is in reply to your memorandum of May 8, 2001 and further to our telephone conversation of June 4, 2001 (Leigh/Godwin). You asked for our views as to whether demutualization proceeds could be treated as surplus in a registered pension plan ("RPP").

It is our understanding that the pension plan of XXXXXXXXXX is a defined benefit RPP trust. The RPP, as holder of a group insurance policy, has received a benefit in connection with the demutualization of XXXXXXXXXX.

Our Comments

If the demutualization benefit was received in the form of cash, it is our view that the RPP would be considered to have received a dividend pursuant to subparagraph 139.1(4)(f)(ii) of the Income Tax Act (the "Act") notwithstanding that the RPP itself may be tax-exempt under paragraph 149(1)(o) of the Act. This deeming rule does not apply if subsection 139.1(14) of the Act is applicable. Subsection 139.1(14) of the Act generally provides that where the demutualization benefit is received because of an interest in a life insurance policy held by an RPP trust, the benefit is deemed to be received under the plan if it is received by any person other than the RPP trust. In the situation described, subsection 139.1(14) of the Act appears not to be applicable since the benefit was received directly by the RPP trust. We note that the provisions of subsection 139.1(12) of the Act would generally apply to deem the receipt of the demutualization benefit to be neither a contribution to, nor a distribution from, the RPP.

If the RPP received shares as a demutualization benefit, the shares would have a cost of nil pursuant to paragraph 139.1(4)(d) of the Act. We note that while the receipt of the shares does not result in an income inclusion, any gain realized on the subsequent disposition of the shares will have to be included in computing the income of the RPP notwithstanding the tax exemption provided under paragraph 149(1)(o) of the Act.

With regard to the question of surplus, it appears to us that the demutualization benefit, whether it be in the form of cash or shares, forms part of the assets of the RPP in the determination of whether there is an actuarial surplus in the RPP.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

We hope that our comments are of assistance.

F. Lee Workman
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate