10 June 1999 Income Tax Severed Letter 9910776 - INTERPRETATION OF "PENSIONABLE SERVICES"

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. Can non-worked periods by certain employees be considered as "pensionable services" for the purposes of clause 8503(3)(c)(iii)(A) of the Regulations?

2. Is there an employer/employee relationship in the various situations?

Position:

1. There is a possibility to continue to accrue lifetime retirement benefits that will count as periods of pensionable services during periods of temporary absence as long as the limits applicable to the pension adjustment provided in subsection 147.1(8) (and section 8507 of the Regulations) are respected and as long as there is an employer/employee relationship.

2. Not enough detail to provide an answer.

Reasons:

1. Wording of the Regulations.

2. Question of facts.

                                    June 10, 1999

      HEADQUARTERS                  HEADQUARTERS
      Robert D’Aurelio              A. St-Amour, CA
      Director                      952-1764
      Registered Plans Division

      Attention:  Michel Cronier
                                    5-991077

XXXXXXXXXX
Interpretation of clause 8503(3)(c)(iii)(A) of the Income Tax Regulations
(the “Regulations”)

This is in reply to your memorandum of February 26, 1999 which included a letter from XXXXXXXXXX with respect to a request for interpretation of what constitutes a “period of pensionable services” for the purposes of clause 8503(3)(c)(iii)(A) of the Regulations.

XXXXXXXXXX requests whether or not non-worked periods by certain employees can be considered as “pensionable services” for the purposes of calculating the early retirement penalty. In his letter, he refers to the Explanatory Note relating to “pensionable services” as follows:

“XXXXXXXXXX

In a telephone conversation, XXXXXXXXXX also referred to

XXXXXXXXXX

Paragraph 8503(3)(c) of the Regulations, for defined benefit provisions of an RPP, requires a reduction in lifetime retirement benefits for early retirement. “Early retirement eligibility service” is relevant in determining whether benefits will be reduced in situations of early retirement listed in subparagraphs 8503(3)(c)(i) and (ii) or the Regulations. It consists of periods of pensionable services and periods of employment.

“Pensionable services” is defined in subsection 8500(1) of the Regulations as periods of which lifetime retirement benefits are provided to the member under a defined benefit provision. One of the conditions for registration of a pension plan is that lifetime retirement benefits be associated with eligible service.

The most common form of eligible service, as described in paragraph 8503(3)(a) of the Regulations, is paid employment in Canada. Other forms of eligible service include periods of temporary absence, of disability, and of employment with predecessor employers or with former employers under other plans.

The receipt of remuneration is a common theme for all forms of eligible service except those of temporary absence and disability. Further, “eligible period of temporary absence” as defined in subsection 8500(1) of the Regulations does not include a requirement that remuneration be received. Periods of temporary absence and disability are, therefore, exceptions to the usual rule and have been warranted acceptable periods of time for which pension benefits may accrue. This is supported by the Explanatory Note to the definition of “eligible period of temporary absence” which states that it permits benefits to be provided under a defined provision of an RPP in respect of an eligible period of temporary absence as if it were a period of paid employment. There is, however, a requirement of a continued employment relationship under this definition because of the reference to the word “employer”. In accordance with this definition, services are not rendered because of certain circumstances listed. In our view, leave of absence, layoff, strike, lock-out are evidence situations where the provision of services is interrupted while employment continues. Therefore, there is a possibility to continue to accrue lifetime retirement benefits that will count as periods of pensionable services during periods of temporary absence as long as the limits applicable to the pension adjustment provided in subsection 147.1(8) (and section 8507 of the Regulations) are respected and as long as there is an employer/employee relationship.

The Explanatory Note to the definition of “pensionable service” was discussed with Catherine Cloutier of Finance. She is of the view that there is no intention and no provision in the Regulations to allow a different interpretation of a “period of pensionable service” for the purposes of paragraph 8503(3)(c). The expression “benefit formula” refers to a provision in particular pension plans of an employer not to the Regulations as such.

In the particular situations described in XXXXXXXXXX letter it is necessary to establish whether the periods of absences are temporary and coincides with a period of employment. In our memorandum of July 23, 1993 (931889) to your office, we provided an interpretation of the words “temporary” and “absence” in the context of the definition of “eligible period of temporary absence”. We also stated that the examples of non-working employment periods cited by the Tax Court case Serafini v MNR (89 DTC 653), would also qualify as eligible periods of temporary absence, whether taken immediately before retirement or at other times during the employment relationship. The following comments were made at page 657:

“...it is quite possible for a person to be an employee without actually working. The fact that Mr. Serafini was no longer required to report for work and was no longer required to perform any duties is not per se determinative of the issue. If his situation requires characterization it can be likened to a pre-retirement leave with full pay and benefits. An attempt by (the employer) to deprive him of any employee benefits during that period would have, in my view, entitled him to sue for breach of his employment contract. It is neither unusual nor infrequent that one can remain employed without actually working. Instances quickly come to mind as sabbatical leave enjoyed by tenured university professors; leave of absence, both with and without pay, for educational purposes; collective agreement permitting the utilization of excess sick leave as pre-retirement or vacation leave and so forth.”

For purposes of the Act, the determination of whether there is an employer/employee relationship is a question of fact. Under subsection 248(1) of the Act “employed” means performing the duties of an office or employment; “employment” means the position of an individual in the service of some other person (including Her Majesty of a foreign state or sovereign) and “servant” or “employee” means a person holding such a position; and “employee” includes officer. The Department relies on the basic tests developed by the courts in deciding whether a particular contract is a contract of services (employer/employee relationship) or a contract for services (client and independent contractor relationship). In Weibe Door Services Ltd. 87 DTC 5025 the court mentionned that the tests consist of the control test, the integration test, the economic reality test and the specified results test. In Viau 86 DTC 1437, the Court said that someone can “hold a position” within the meaning of the Act without actually working and it is neither unusual nor infrequent that one can remain employed without actually working. In Henderson 91 DTC 1116, the Tax Court considered whether the taxpayer was in “employment” as defined in subsection 248(1) of the Act. For that purposes, it was stated that “to be in service of some other person” means that the employee has a duty to serve that other person who in turn has a right to those services pursuant to a contract of mutual rights and duties”.

In the situations that are described in XXXXXXXXXX letter, it is impossible to determine whether or not there is an employer/employee relationship because of the lack of information. We are of the view that the contract of employment which provides the rights and obligations of the employer and the employee is an important tool to determine whether or not a continued employer/employee relationship exists during the non-worked period in each case. It is also, in our view, more important to find out the actual circumstances surrounding the performance of services and whether such findings of facts agree with what is stated in the contracts. We discussed this matter with Jean-Philippe Morin of the Revenue Recovery Directorate which provides rulings relating to employer/employee relationship for the CPP and EI purposes. He has agreed to provide you with further comments on an employer/employee relationship in the situations mentioned in XXXXXXXXXX letter. A copy of our memorandum to his attention is attached for your information.

Finally, we have discussed the comments expressed in this memorandum with XXXXXXXXXX. Although he agrees with our interpretation, he asked that we provide administrative relief because it is very onerous and time consuming to determine whether continued employment relationships exists in each individual cases. We informed him that there is no provision for administrative relief and that the Regulations are interpreted and administered consistently for every taxpayer.

If you have any further questions, do not hesitate to call Adèle St-Amour at 952-1764.

for Director
Financial Industries Division
Income Tax Ruling and
Interpretation Division
Policy and Legislation Branch