Principal Issues: [TaxInterpretations translation] What is the tax treatment of the sale of an employer's interest in the actuarial surplus of a pension plan?
Position: By virtue of subparagraph 56(1)(a)(i), the proceeds of the sale must be included in the vendor's income in the taxation year in which they are received.
Reasons: According to the facts, the proceeds from the sale of the actuarial surplus constitute a payment in respect of a retirement or pension benefit.
February 14, 2008
XXXXXXXXXX Tax Services Office Headquarters XXXXXXXXXX Income Tax Rulings Directorate Important Files Section Michel Lambert, CA, M.Fisc. Attention: XXXXXXXXXX (613) 957-8968
2007-025640
XXXXXXXXXX
Sale of the XXXXXXXXXX
This is further to your memorandum of November 21, 2007 regarding the sale of the actuarial surplus of the Pension Plan for Employees of XXXXXXXXXX Corporation.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Names of the parties
XXXXXXXXXX. The Vendor
XXXXXXXXXX The Purchaser
The Pension Plan for Employees of the XXXXXXXXXX Corporation The Plan
The Régie des rentes du Québec The Regulatory Authority
The Facts
1. On XXXXXXXXXX, the Vendor sold all the assets of its XXXXXXXXXX division for $XXXXXXXXXX, including its rights and obligations as a participating employer in the Plan for its employees.
2. Clause XXXXXXXXXX of the sale agreement indicates how the total sale price was allocated to the various assets sold. The parties allocated $XXXXXXXXXX to the actuarial surplus of the Plan.
3. Clause XXXXXXXXXX of the sales contract states that the transfer of the rights and obligations of the Vendor as a participating employer in the Pension Plan from the Vendor to the Purchaser constitutes an amendment to the Plan which is subject to the approval of the Regulatory Authority.
4. In clause XXXXXXXXXX of the sales contract, the Purchaser acknowledges that there is no guarantee as to the ownership of the surplus in the event of termination of the Plan.
5. Clause XXXXXXXXXX of the Plan provides in part as follows:
XXXXXXXXXX [...] All contributions to the Plan will be made to the pension fund, which is not part of the income or assets of the corporation [the Vendor].
XXXXXXXXXX [...]
XXXXXXXXXX The fund consists of the following contracts:
XXXXXXXXXX
XXXXXXXXXX [...]
XXXXXXXXXX If at any time a surplus arises from the operation of the Plan which is not required to meet existing actuarial liabilities, as determined by the actuary, such surplus shall, subject to any relevant legislation, be refunded to the Corporation [the Vendor] where it shall be applied to meet the Corporation's obligations in respect of the cost of benefits under the Plan for the current and future years. [...]
Your Opinion
6. You are of the view that the actuarial surplus should be included in income for the taxation year in which the amount is received, with this inclusion being pursuant to subparagraph 56(1)(a)(i).
7. In your opinion, the receipt of the amount of $XXXXXXXXXX constitutes a superannuation or pension benefit, within the meaning of that expression in subsection 248(1). In support of your view, you referred to the preamble to that expression, which states that a superannuation or pension benefit includes any amount received out of or under a superannuation or pension fund or plan. According to you, this expression does not only include amounts received from the plan but also amounts received from another entity. You also refer to paragraph (b) of the definition of that term which provides that a payment to an employer of a beneficiary of a pension plan “resulting from an amendment to or modification of the fund or plan” is a pension benefit.
Vendor’s Opinion
8. The Vendor is of the view that there is no provision in the Act that requires an employer to include the repayment of an actuarial surplus in income.
9. The Vendor refers to a passage in interpretation E9229497 where we stated the following:
The relevant provision governing an income inclusion with respect to a pension plan is subparagraph 56(1)(a)(i) of the Act and an employer will be taxed under the provision only where an amount is paid out of the plan to the employer.
10. The Vendor argues that subparagraph 56(1)(a)(i) does not apply because the amount in question is received from the Purchaser and not from the Plan. It adds that the Supreme Court has stated that the words must be read in context, i.e., in light of the general spirit of the Act.
11. The Vendor is also of the view that this is a capital transaction, namely a sale of a business.
12. Finally, the Vendor claims that the sum of $XXXXXXXXXX is attributable to the sale of goodwill as it cannot be attributed to any other asset.
Your Question
13. You asked whether the amount of $XXXXXXXXXX is a superannuation or pension benefit that must be added to the Vendor's income pursuant to subparagraph 56(1)(a)(i).
Our Opinion
14. Section 248(1) defines a superannuation or pension benefit as follows
superannuation or pension benefit includes any amount received out of or under a superannuation or pension fund or plan and, without restricting the generality of the foregoing, includes any payment made to a beneficiary under the fund or plan or to an employer or former employer of the beneficiary thereunder
(a) in accordance with the terms of the fund or plan,
(b) resulting from an amendment to or modification of the fund or plan, or
(c) resulting from the termination of the fund or plan;
15. We are of the view that the $XXXXXXXXXX paid by the Purchaser is not a superannuation or pension benefit as it is not paid out of or under a superannuation or pension fund or plan but rather as part of the sale of the assets of a division of the Vendor. Nor is it an amount paid to the Vendor pursuant to the terms of the fund or plan or resulting from the termination of the fund or plan. We are also of the view that it is not an amount paid to the Vendor as a result of an amendment to the fund or plan. Rather, it is the Plan that will be amended as a result of the payment to the Vendor of $XXXXXXXXX.
16. Subject to certain exceptions that do not apply in this case, subparagraph 56(1)(a)(i) provides that a taxpayer must include in computing income for a taxation year any amount received by the taxpayer in the year as, on account or in lieu of payment of, a superannuation or pension benefit. That subparagraph does not refer to the payer. Thus, whether the payer is a pension plan, a pension fund or another person is not a determining factor. Consequently, the fact that the $XXXXXXXXXX was paid by the Purchaser is not in itself a bar to the application of subparagraph 56(1)(a)(i).
17. In our view, it is necessary to establish whether the amount of $XXXXXXXXXX constitutes an amount received “on account or in lieu of payment of” of a superannuation or pension benefit.
18. The English version of the Act translates the phrase as “on account or in lieu of payment of, or in satisfaction of”. The term "in lieu of" was discussed in Transocean Offshore Ltd. v. Her Majesty the Queen1 where the Federal Court of Appeal stated
However, paragraph 212(1)(d) of the Income Tax Act also includes a payment made in lieu of compensation for the use, in Canada, of property. The ordinary meaning of the phrase "in lieu of", according to a number of dictionaries, is "instead of" or "in place of": Black's Law Dictionary (7th ed., 1999), The Canadian Oxford Dictionary (2001, Oxford University Press), Gage Canadian Dictionary (1983, Gage Publishing Limited), The Canadian Dictionary of English Law (2nd ed. 1995 Thomson Canada Limited). It seems axiomatic that an amount that is paid instead of a payment of a particular legal character, or in the place of such a payment, does not have that same legal character. Parliament, in using the words "in lieu of" in paragraph 212(1)(d), must have intended to expand the scope of paragraph 212(1)(d) to include payments other than payments that have the legal character of rent.
[...]
As mentioned above, the ordinary meaning of that phrase connotes something that takes the place of something else or is a substitute for something else. Theoretically, a thing may take the place of another thing if it performs exactly the same function as that other thing, or if it performs a function that is not exactly the same but is a reasonable substitute. [...]
19. It must therefore be determined whether the amount of $XXXXXXXXXX received by the Vendor from the Purchaser is a reasonable substitute for a superannuation or pension benefit.
Under this definition in subsection n 248(1), a payment made to an employer or former employer of a beneficiary in accordance with the terms of a pension fund or plan is a superannuation or pension benefit. Under the terms of the plan, a surplus that is not required to meet existing actuarial liabilities, as determined by the actuary, could be refunded to the corporation (the Vendor) or allow it to take a contribution holiday for the year in question and subsequent years.
In our view, such a payment of that excess would constitute a superannuation or pension benefit that should be included under subparagraph 56(1)(a)(1) in the Vendor's income for the taxation year in which the amount is received. Instead of obtaining a refund under the terms of the Plan, the Vendor elected to assign its rights to the Purchaser in consideration for a payment of $XXXXXXXXXX. We are of the view that that payment is a reasonable substitute for the superannuation or pension benefit that it could have received directly from the Plan. Consequently, by virtue of subparagraph 56(1)(a)(i), that amount must be included in the Vendor's income for the taxation year in which it is paid to it.
20. In closing, the question arises as to whether the English and French versions of the Act produce the same result. In that regard, the court in Transocean Offshore Ltd.2 concluded that the French expression "au titre de" was at least as broad as the corresponding English expression. In reaching this conclusion, it considered that the French version sometimes uses the expression "au titre de" whereas the English version uses the expression "in respect of". Referring to Nowegijick v. The Queen3 , the Court recalled that the expression "in respect of" must be interpreted broadly. In that respect, the relevant passage in Transocean Offshore Ltd. reads as follows
[53] Counsel for Transocean argues that the French version of paragraph 212(1)(d) of the Income Tax Act is narrower than the English version, because the French phrase "au titre" means "as", and does not mean "instead of". Counsel for the Crown answers this argument by explaining, with numerous references to the legislative history of the French version of the Income Tax Act, that the French phrase "au titre" is used in the French version of the Income Tax Act to mean "in respect of". The phrase "in respect of" has been described as "the widest of any expression intended to convey some connection between related subject matters": Nowegijick v. The Queen, [83 DTC 5041] [1983] 1 S.C.R. 29, per Dickson, J., writing for the Court at page 39.
[54] The French version of the statutory provision considered in Nowegijick was not "au titre", it was "quant à". However, the Nowegijick definition of the phrase "in respect of" was applied in The Queen v. Savage, [83 DTC 5409] [1983] 2 S.C.R. 428, in which the statutory provision in issue used the phrase "in respect of" in the English version and "au titre" in the French version. The case involved an employee of a life insurance company who received from her employer $300 as a result of passing certain examinations she had taken, voluntarily and on her own time, to improve her understanding of the life insurance business. There was a dispute as to whether the $300 was taxable as income from employment on the basis that it was, in the words of what was then paragraph 6(1)(a) of the Income Tax Act, R.S. 1970-71-72, c. 63, a benefit or advantage (emphasis added):
[...] in respect of, in the course of, or by virtue of an office or employment.
[...] au titre, dans l'occupation ou en vertue de la charge ou de l'emploi.
[55] Dickson, J., writing for the majority, held that the payment fell within this provision. (He went on to conclude that the payment was exempt from tax because it also came within the scope of a more specific provision, paragraph 56(1)(n) of the Income Tax Act, which taxed certain awards, but only over $500.).
[56] Given the manner in which the French phrase "au titre" is typically used in the French version of the Income Tax Act, the Crown has the better side of this debate. I conclude that the French version of paragraph 212(1)(d) of the Income Tax Act is at least as broad as the English version.
Regarding the application of subparagraph 56(1)(a)(i) to the amount of $XXXXXXXXXX, we are of the view that the English and French versions of the Act produce the same result.
Conclusion
21. In our view, the $XXXXXXXXXX is not a superannuation or pension benefit but must still be included in the Vendor's income, for the taxation year in which it is received by virtue of subparagraph 56(1)(a)(i) as it is a reasonable substitute for a superannuation or pension benefit.
22. The approach we have used in this case is the same as that taken by the Tax Court of Canada in Michael Holzhey v. Her Majesty the Queen,4 which dealt with the application of paragraph 12(1)(c).
Access to Information
23. For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. 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 that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 FCA, 2005 DTC 5201, paras. 47 and 60
2 id. paras. 53 to 56
3 83 DTC 5041; 1 S.C.R. 29
4 2007 TCC 247