Superannuation or Pension Benefit

While still residing in Australia, the taxpayer and her (now ex-)husband created an Australian Self-managed Super Fund (“SMSF”), being an Australian superannuation fund that is operated solely for the purpose of providing retirement benefits for the members or their dependants. The taxpayer and her ex-husband were the original members of the SMSF, and they were the only directors of the SMSF corporate trustee.

Prior to the taxpayer’s immigration to Canada, contributions to the SMSF were made both by the taxpayer and her husband, as both concessional (i.e., pre-tax) and non-concessional (i.e. after-tax) contributions, and by her husband’s employer as concessional contributions. Her ex-husband received a portion of the SMSF assets as part of their divorce settlement, following which she became the sole beneficiary.

The income of the SMSF was subject to Australian tax at a flat rate of 15%, or 10% in the case of long-term capital gains, and all benefits paid to the taxpayer are free of Australian tax given her age. CRA stated:

Based on the fact that contributions were made to the SMSF by an employer of the taxpayer’s ex-husband in consideration for his employment services and that the sole purpose of the SMSF is to provide retirement benefits to its members, it is reasonable to conclude that the SMSF is a pension plan for purposes of the Act. The fact that the taxpayer’s ex-husband previously received a portion of the SMSF assets in full satisfaction of his interest in the SMSF would not cause the plan to cease to be a pension plan for purposes of the Act. Accordingly, any payments received out of or under the SMSF by the taxpayer would be included in her income under subparagraph 56(1)(a)(i) in the year of receipt. It is not relevant that some contributions made to SMSF by the taxpayer were not deductible, or that the benefits are not taxable, under Australian income tax law.

Before an Irish resident became a Canadian resident, she transferred the funds from a conventional Irish company pension plan to an Irish Personal Retirement Savings Account (PRSA), and will then transfer the funds in the PRSA to an Irish Approved Retirement Fund (ARF). In finding that neither the PRSA nor the ARF qualified as a pension plan or an employee benefits plan, CRA stated:

If no employer contributions have been made to a foreign retirement plan, the plan will not be considered a pension plan, nor an EBP. In accordance with Abrahamson … the fact that the original source of funds in a foreign individual retirement plan was a pension plan is not relevant.

On this basis:

withdrawals from the plan would not be required to be included in the recipient’s income under paragraph 56(1)(a) of the Act as pension income nor under paragraph 6(1)(g) as an amount received out of an EBP. Nevertheless, any income or capital gain earned in connection with such a plan is generally taxable in Canada on a current, annual basis … .

Under the Employees Provident Fund of Malaysia (“EPF”), which is administered by the Ministry of Finance Malaysia, employees and employers are required to make minimum mandatory contributions, which are deductible under the limits imposed by Malaysian tax law. A member generally is only entitled to withdraw accrued benefits relating to his or her contributions upon retirement at 55, death, incapacity, or emigration. Is an individual who received a lump sum payment from the EPF entitled to contribute that amount to an RRSP on a tax-deferred basis?

Before paraphrasing the requirements under s. 60(1)(j)(i) for such a deduction, CRA stated:

a foreign plan will be considered to be a superannuation or pension plan where contributions are made to the plan by or on behalf of the employer or former employer of an employee in consideration for services rendered by the employee and the contributions are used to provide an annuity or other periodic payment on or after the employee’s retirement.

Would a pension payment received from a public pension plan (the “Plan”) by a Canadian resident taxpayer and citizen of the U.S. qualify for the $10,000 “death benefit” exemption or otherwise be taxable in Canada, where the distribution was made (and included in the taxpayer’s income for U.S. tax purposes) to the taxpayer as a designated beneficiary of the decedent (a U.S. resident and a retired member of the Plan) in accordance with the terms of the Plan? CRA responded:

A “superannuation or pension benefit” is included in income under subparagraph 56(1)(a)(i) and does not qualify for the $10,000 “death benefit” exclusion.

Generally, a plan…[is] a superannuation or pension plan where contributions have been made to the plan by or on behalf of an employer or former employer of an employee in consideration for services rendered by the employee and the contributions are to be used to provide an annuity or other periodic payment on or after the employee's retirement. Provided these conditions were met in respect of the Plan, it would be considered a pension plan…and the payment received by the beneficiary of the decedent…would constitute a pension benefit…[to] be included in income… pursuant to subparagraph 56(1)(a)(i)… subject to relief available under the Canada-U.S. Tax Treaty (the “Treaty”).

CRA went on to indicate that relief from inclusion under s. 56(1)(a)(i) would be provided under Art. XVIII, para. 1 of the Treaty to the extent of the amount that would be excluded from taxable income in the U.S. if the recipient were a resident thereof (e.g., respecting a deduction under Code s. 691(c)(1) respecting a pro rata portion of U.S. estate tax).

Before concluding that the retroactive deferral under ss. 110.2 and 120.31 could apply to lump sum payments received from a supplemental employee retirement plan, CRA stated:

A supplemental employee retirement plan is a non-registered pension plan that is generally established to provide superannuation or pension benefits to the beneficiaries of the plan to supplement those provided by the employer's registered pension plan. Generally, when such a plan is funded, it is considered a retirement compensation arrangement. Amounts received by the beneficiaries of such an agreement generally constitute superannuation or pension benefits and are taxed in the year of payment under paragraph 56(1)(x). Similarly, amounts paid under an unfunded supplemental employee retirement plan are generally included in computing the income of the beneficiaries as superannuation or pension benefit in the year in which they are received. This occurs under paragraph 56(1)(a).

The taxpayer wishes to transfer funds from a personal pension scheme (PPS) in the United Kingdom, which is a self-funded retirement plan, to a registered retirement savings plan (RRSP).

A s. 60(j)(i) transfer is not available as the PPS is not a superannuation or pension plan given the CRA policy that such a plan is one to which "contributions have been made to the plan by or on behalf of an employer of an employee in consideration for services rendered by the employee and the contributions are used to provide the employee with an annuity or a pension on or after the employee's retirement," whereas here only the taxpayer had made contributions.

On the sale by the Vendor of one of its business divisions, the employees of that division were transferred to the purchaser, and the assets of the defined benefit pension plan regarding those employees (the “Plan”) were transferred to the Purchaser and the Purchaser assumed the related pension commitments, in two transfers (which was permitted as a result of the approval of the Régie des rentes du Québec). There was an actuarial surplus respecting the Plan, which could allow the purchaser to enjoy a contribution holiday. On each transfer, the Purchaser paid an amount to the Vendor in respect of the actuarial surplus.

After finding that these amounts were taxable to the Vendor under s. 9, CRA went on to indicate that, in the alternative, that they were taxable under s. 56(1)(a)(i). In particular, they constituted the receipt by the Vendor of “superannuation or pension benefits.” Although they were not superannuation or pension benefits in the ordinary meaning of that phrase, under the s. 248(1) definition, it would be reasonable to regard such amounts as having been received “under” the Plan, as they would not have been received but for the actuarial surplus that arose under the Plan. In addition, “the Plan was modified as a result of the transfer of members to the Plan and the transfer of a portion of the assets and liabilities of the Plan to the Purchaser's plan” and such transfer would not have been possible without approval of Retraite Québec. Thus, the amounts were received by the Vendor as a result of a “modification” of the Plan (even though there was no change to its terms), so that para. (b) applied to render the payments as superannuation or pension benefits.

Lump sum payments made by the Quebec government to members of two plans that had deficits are not be taxable given that the amounts are not received as, or in full or partial payment of, a superannuation or pension benefit or allowance and did not represent a substitution of such amounts, and were not derived from a source of income.