2013-0508321I7 Pension Corporations - 149(1)(o.2)(iii)

Principal Issues: Does the 10% quantitative limit applicable for the PBSA and provincial pension benefits legislation apply at the level of a pension plan or pension corporation for purposes of the preamble in 149(1)(o.2)(iii)?

Position: The 10% quantitative limit is to be applied in a manner that is consistent with the PBSA and provincial pension benefits legislation.

Reasons: We have confirmed the intent and purpose of the preamble to 149(1)(o.2)(iii) with the Department of Finance.

Author: Allen, Gary
Section: 149(1)(o.2)

                                                                                                                                                December 21, 2016

XXXXXXXXXX                                                                                                                        Income Tax Rulings Directorate
XXXXXXXXXX TSO                                                                                                                G. Allen
                                                                                                                                                (613) 670-9051
Att: XXXXXXXXXX
                                                                                                                                                2013-050832

Pension Corporations - Subparagraph 149(1)(o.2)(iii)

We are writing in response to your memo dated November 22, 2013, and your subsequent emails and telephone conversations (XXXXXXXXXX/Allen and XXXXXXXXXX/Allen/Hewlett) concerning the audit of a pension corporation that satisfies the conditions of subparagraph 149(1)(o.2)(iii) of the Income Tax Act (the “Act”).  Specifically, you are requesting clarification concerning our interpretation of the preamble to subparagraph 149(1)(o.2)(iii) of the Act as it pertains to pension investment corporations and our response to Question 42 at the 2007 Canadian Tax Foundation Conference.

Unless otherwise stated in this memo, all references in this memo to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Suppl.), as amended to the date of this memo.

Our Comments

Paragraph 149(1)(o.2) exempts certain pension corporations from Part I tax where the relevant conditions listed therein are satisfied.  In general, subparagraph 149(1)(o.2)(iii) will exempt a pension investment corporation from Part I tax where the preamble, clauses (A), (B) and (C) of subparagraph 149(1)(o.2)(iii) are satisfied and either the conditions of subparagraph 149(1)(o.2)(iv) or (v) are also satisfied.

The preamble to subparagraph 149(1)(o.2)(iii) provides that a pension investment corporation make no investments other than investments that a pension fund or plan is permitted to make under the Pension Benefits Standards Act, 1985 (the “PBSA”) or a similar law of a province.  In general, the PBSA and the pension benefits legislation of certain provinces contain a rule that states that a pension plan cannot invest more than 10% of the pension plan’s assets in any one investment (the “10% quantitative limit”).  It is our understanding that the 10% quantitative limit is applied at the level of a pension plan, and not at the level of a pension corporation, for purposes of the PBSA and provincial pension benefits legislation. This is consistent with the diversification objective of the 10% quantitative limit.

In our view, the wording of the preamble to subparagraph 149(1)(o.2)(iii) is not clear and unambiguous and therefore, it is appropriate in interpreting the provision to apply a textual, contextual and purposive approach and look to its purpose or intent.

We have confirmed that the policy intent of the provision is to defer to the investment requirements of the PBSA or provincial pension benefits legislation in establishing the investments that a tax-exempt pension investment corporation is permitted to make.

As a result, it is our view that it is appropriate to interpret this provision in a manner that is consistent with the manner in which the 10% quantitative limit is interpreted and applied for purposes of the PBSA and provincial pension benefits legislation. Accordingly, we will consider the 10% quantitative limit to be satisfied for the purpose of the preamble to subparagraph 149(1)(o.2)(iii) if it is satisfied for purposes of the PBSA or provincial pension benefits legislation. As noted above, the 10% quantitative limit is applied at the pension plan level rather than at the pension corporation level for this purpose.

This position also extends to the same investment requirements contained in clause 149(1)(o.2)(ii)(B) and subclause 149(1)(o.2)(ii.1)(B)(IV).

We trust the above comments clarify our position concerning this issue and our response to Question 42 at the 2007 Canadian Tax Foundation Conference.

Randy Hewlett
Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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