15 July 1996 Internal T.I. 9623067 - RPP SURPLUS PAYOUT ON WINDUP

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:

Application of ITAR 40 to pension windup

Position:

May apply.

Reasons:

General statement of law

							July 15, 1996

	Sudbury Tax Services		Headquarters
	Problem Resolution Program	W.C. Harding
(613) 957-8953
	Attention:  Chris Bischoff
							7-962306

Pension Surplus and ITAR 40

This is in reply to your memorandum of June 25, 1996, with respect to the application of section 40 of the Income Tax Application Rules ("ITAR") to the payment of an amount out of the surplus upon the winding-up of a registered pension plan ("RPP"). In particular you have asked whether such a lump sum payment of surplus should be considered a gratuitous amount or if it could be considered an amount that had accrued over years of service.

Subsection 40(1) of the ITAR has application to amounts paid out of a pension plan after 1973 by virtue of the provisions of subsection 40(7) of the ITAR. In general the provisions provide that a taxpayer who receives certain amounts out of an RPP can elect to exclude these amounts from income for the purposes of Part I of the Income Tax Act (the "Act") and instead pay a reduced rate of tax on the amount. ITAR 40(1)(a)(i)(B) provides that this treatment is available with respect to a single payment made out of an RPP where the payment is made on the winding-up of the plan in full satisfaction of all the rights of the payee in or under the plan.

In our opinion, to qualify a payment must be the last payment made under a plan and be made in full satisfaction of all remaining rights a member has under a plan. However it is not required to be the only payment. For example, an amount could also be transferred to an RRSP in satisfaction of benefits available under a plan prior to the wind-up of the plan. Therefore a plan could provide or be amended to provide for the payment of a portion of the plan's surplus to a member on the wind-up of the plan such that the provisions of ITAR 40 could apply to that payment. The amount does not have to be accrued over a period of time. However, the effect of subsection 40(7) of the ITAR may effectively limit the amount eligible for reduced taxation to the benefits that would have accrued for services rendered prior to December 31 1972.

We would also like to provide the following cautions with respect to the specific situation you are considering. From the information you have provided we note that the taxpayer's employer has stated the surplus is payable in full to it. However they state that they have agreed that upon receipt of the surplus they will set aside a portion to be shared by certain employees and former employees. If this is factually correct, the provisions of ITAR 40 would not be available to these employees because the payment would not be a payment out of or under a pension plan as required under subsection 40(7) of the ITAR but would be a payment from the employer.

In addition we are also concerned about the elections which have been offered to the taxpayer, and we would like to draw your attention to the following.

Elections to transfer amounts from an RPP to an RRSP or to acquire an annuity may not be made on a tax-free basis unless the transfers are made directly from an RPP and the provisions of the RPP provide for the payments. However, there is no indication in the document submitted that such amendments have been made with respect to the plan in question. In fact, as noted above, the document indicates that the surplus is to be paid to the employer before the funds are distributed to or on behalf of the employees. Accordingly, if an amount has been transferred to an RRSP or to purchase an annuity in respect of an enhancement of benefits, it could not have been done on a tax-free basis.

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