Category Archives: Superannuation or pension benefit

Superannuation or Pension Fund? – Sas Ansari

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Superannuation or Pension Fund or Plan?

Jacques v The Queen, 2016 TCC 245

At issue was whether a particular 401(k) plan met the definition of “superannuation or pension fund” and therefore required to be included in income under subparagraph 56(1)(a)(i) of the Income Tax Act.

NOTE: It is likely that the particular outcome of this decision will be limited to this case and not even the facts. The Minister failed to lead evidence as to the legislative authority and therefore nature of the plan.  This evidence will likely alter the outcome of future decisions about 401(k) plans.  

ANALYSIS

ITA subparagraph 56(1)(a)(i) requires a taxpayer to include an amount received in the year “on account or in lieu of payment, or in satisfaction of a superannuation or pension benefit.  A number of benefits are expressly listed as having to be included, but where the particular plan or fund is not listed, the court must determine whether it satisfies the meaning of “superannuation or pension benefit” under subsection 248(1) as “superannuation or pension fund or plan is not defined in the ITA (para 3).

The Court considered the following aspects in determining the nature of the plan:

  • The legislative authority for the plan – by reference to the particular legislation that gives rise to the plan, so as to determine whether the plan is a savings plan or a superannuation or pension fund or plan (para 6);
  • The purpose of the plan – nothing that the accumulation of savings is an important aspect of a retirement plan, but the mere fact that money is being saved does not indicate whether the vehicle is meant to be used to save for retirement (para 8);
  • Enrollment in the plan – automatic enrollment, elective enrollment, or elective opt-outs are not in themselves determinative (para 10);
  • Employee contribution to the plan – where the employee has the power to significantly alter the amount contributed to the plan, the vehicle appears to be a savings plan and not a superannuation or pension fund or plan (para 12);

  • Employer contrigution to the plan – where the employer can choose whether or not to match contributions to the plan, or to what extent to contribute, is unusual as employer contributions are an automatic part of a standard workplace pension plan (paras 13-14);
  • Vesting –  employee contributions vesting immediately and employer contributions vesting after a period of employment is consistent with a superannuation or pension fund or plan (para 15);
  • Investment – where an employee has own account, can direct how the account is invested (even if from a list of investment), with the ability to switch investments is consistent with both savings and pension plans (para 16);
  • Early withdrawals – where the employee can ask to withdraw funds for purposes other than retirement suggest that the plan is a savings plan and not a retirement plan (para 17)
  • Distributions out of the plan – this is seen as the most important aspect (para 18).

In Abrahamson v. M.N.R., 1990 CarswellNat 534, the TCC held that “the words ‘superannuation or pension benefit’ in subparagraph 56(1)(a)(i) contemplate a payment of a fixed or determinable allowance paid at regular intervals to a person usually, but not always, as a result of the termination of employment for the purpose of providing that person with a minimum means of existence”.  The regulatory of the payments according to the terms of the plan and not at the discretion or direction of the beneficiary is consistent with a retirement plan (para 19). See also Woods v. The Queen,2010 TCC 106.  at paragraph 30.

This plan did not provide for anything close to a fixed or determinable allowance or regular post-retirement income, rather the default was a lump sum payment after a certain age, irrespective of whether the employee continued to work or not (para 21).  The only requirement to take our regular amounts occurred when the employee had reached a certain age, had not taken out the money as a lump sum, and was still working at which point s/he was forced to take out minimum distributions (but could do so at any time) (para 21).  This was not seen as enough resemblance to a fixed annual distribution, and the lump sum option more resembled a savings plan and not a superannuation or retirement fund or plan (para 22).

Sas Ansari, BSc BEd PC JD LLM PhD (exp) CPA In-Depth Tax 1, 2 &3

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Emond v The Queen, 2012 TCC 304

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Assignment of Pension Benefits vs Division of Matrimonial Property (ie pension amounts)

Emond v The Queen, 2012 TCC 304

At issue here was whether the payment from the ex-husband to the ex-wife (Taxpayer) as part of a separation agreement and division of matrimonial property, calculated as 1/2 of his net annuity payments, ought to be included in income for the ex-wife under subparagraph 56(1)(a)(i) of the ITA and on the definition of “superannuation or pension benefit” in subsection 248(1)?

The Court held that the payments here were agreed to be net amounts, and were the division of the husband’s income, and that these amounts received in accordance to the separation agreement, being a division of property, are not taxable as pension income pursuant to subparagraph 56(1)(a)(i) of the ITA.  The Court drew a distinction between the assignment of pension benefits to the ex-spouse (which would be taxable to the receiving ex-spouse) and an agreement to split another’s income as part of the division of matrimonial property (not taxable to receiving ex-spouse).

FACTS

The Taxpayer’s marriage broke down in 2001, and by consent order the spouses agreed that the spouse of the taxpayer was to make payments to the taxpayer for spousal support and as a portion of his retirement annuity.  The taxpayer failed to include the payments received from her spouse that represented a portion of his retirement annuity for the taxpayers under appeal. The consent order stated that the split of the annuity payments, being part of the division of marital property, was “not to be considered spousal support by” either of them, and was to consist of ½ of the net amount of the annuity payment.

 ARGUMENTS

The CRA took the position that the consent order was not clear, and did not specify who was responsible for the tax. The CRA relied on subparagraph 56(1)(a)(i) of the ITA and on the definition of “superannuation or pension benefit” in subsection 248(1) to argue that the taxpayer was taxable on the half of the annuity she received from her former spouse.

The CRA argued that it was the intention of the consent order to divide the source of income equally among the spouses, and that each would pay tax on the income from that source. Thus, the pension benefits were received by the taxpayer in lieu of the support amounts initially received. The CRA relied on the FCA decision in Walker v. R., 1999 CarswellNat 2307, and on the TCC decision in Lane v. The Queen, 2007 TCC 674.  The Court noted, however, that in those cases the spouses agreed to assign ½ of the GROSS proceeds and this was to be divided at source.

ANALYSIS

The Court looked at the decision in Andrews v. The Queen, 2005 TCC 246, where the ex-husband was paid the full amount of the pension, and the husband paid the portion to the ex-wife directly. Bowman CJ felt boubd by the FCA decision in Walker, supra, but said that the payments directly from the ex-husband to the ex-wife were not superannuation or pension benefits in the hands of the ex-wife within the meaning of s 248(1), but was rather a division of matrimonial assets, being neither a support amount nor a pension benefit in the hands of the recipient ex-spouse.  Bowman CJ had difficulty with the decision of the FCA in Walker because “an actuarial calculation of the present value of the husband’s pension and a lump sum paid to her by her husband, the lump sum would clearly not have been taxable, either as a pension benefit or as a support amount”, and asked why amontly payment would then be taxable.  He also

found the reasoning in Walker difficult to reconcile with concepts firmly entrenched in income tax law:

(a)   absent sham, the form of a transaction prevails over notions of “substance” or “economic reality”.

(b)  the tax consequences of a transaction are to be determined on the basis of what was in fact done not what might have been done.

(c)   the parties to a transaction cannot bind either the Court or the Minister by an agreement as to the tax consequences of the transaction.

The Court then referred to the decision in St-Jacques v. Canada, [1999] T.C.J. No. 929 (QL), 1999 CarswellNat 3121, which distinguished Walker and stated that all that was occurring when the husband agreed to share his pension income was that, an agreement to share his income with another person – It did not make the recipient one who was receiving income, and thus 56(1)(a)(i) did not apply.  The TCC there said that ” assigning entitlement to a gross pension income does not have the same effect as sharing net pension income with another person.”