Actuarial Surplus

Administrative Policy

28 January 2021 Internal T.I. 2019-0817641I7 - Acquisition of rights to pension surplus

CRA finds that the purchase price of a business allocated to the actuarial surplus for a defined benefit plan was a non-deductible capital expenditure

A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan. The plan permitted the employer to use actuarial surplus to reduce contributions, or to be returned to the employer to the extent allowed by the Act and pension law. Any surplus assets were to be returned to the employer on winding-up the Plan. These potential entitlements passed to the Purchaser as the new sponsor.

  • In finding that the amount allocated to the actuarial surplus was a capital expenditure that did not qualify as an eligible capital expenditure (ECE) (and would not have qualified as the cost of a Class 14.1 property) had the acquisition occurred after 2016, the Directorate indicated that:
  • Having regard for the exclusion from ECE (or Class 14.1) for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations”
  • Furthermore, there the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
  • The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., there it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
  • Regarding the specific exclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead “was supported by actuarial estimates and was objectively quantifiable,” “represents real value that can be applied to offset the employer’s contribution obligations for a number of years” and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed” and, thus, “was not an unidentified intangible.”
  • The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
Words and Phrases
goodwill reserve
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) purchased actuarial surplus was a reserve 195
Tax Topics - Income Tax Act - Section 78 - Subsection 78(4) s. 78(4) exclusion would apply to the purchase of actuarial surplus 191
Tax Topics - Income Tax Act - Section 13 - Subsection 13(35) purchased actuarial surplus was not deemed goodwill under s. 13(35) 222

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