The Primary Purpose Test
Article originally published by Benefits Canada, October 5, 2007
While pension plans must be registered under applicable provincial or federal pension benefits standards legislation, they must also be registered under the federal tax legislation in order to shelter contributions and earned income from immediate tax, or to be able to transfer pension credits to a reciprocal pension plan or RRSP on a tax deferred basis. Under our current tax laws, certain conditions must be satisfied before registration will be granted.
One of those conditions is known as the “primary purpose” test, which, simply stated, says that the primary purpose of the pension plan must be to provide periodic payments to retirees from the date of retirement until death in respect of their service as employees. The courts have held that it is a question of fact as to whether or not the primary purpose test has been met. This has made compliance with this condition a matter of uncertain predictability.
However, recently the Federal Court of Appeal has provided new guidance on this issue. Two of the most recent cases before that court involved individuals who had elected to transfer their pension credits from their registered pension plan(one from the Ontario Teachers’ Pension Plan and one from OMERS)into newly established individual pension plans(IPP). In each case, the plan sponsor was a newly established corporation and the plan beneficiary was its president.
According to CRA’s investigation, there was no bona fide employment relationship between the corporation and the president. In both cases, no employment services were provided, and no remuneration was paid during the relevant time period. Further, these individuals had other employers from whom they received remuneration during this period. The Minister of National Revenue also alleged that the pension plans were established for the purpose of receiving pension credit transfers from the prior pension plans, and not for the purpose of providing lifetime retirement benefits. In both cases, there was evidence that shortly after the transfer to the IPP, “surplus” was withdrawn from the applicable plan, which would not have been available if the member had remained in the prior plan. The court upheld the decision of the Minister to issue notices of intent to revoke the registration of these newly established plans, as they failed to comply with the primary purpose test set out in the tax laws.
In another recent case, the Court upheld the Minister’s revocation of a pension plan’s registered status retroactive to the date of its registration, determining that as the pension plan had never satisfied the “primary purpose” test, it was never eligible for registration. This case involved a pension plan with several members, but only one or two of the members had ever been employees receiving remuneration.
These recent cases serve as a reminder that the Minister will issue a notice of intent to revoke a plan’s registered status in circumstances where the “primary purpose” has not been met. As the cases show, an essential component of this test is that a bona fide employment relationship must exist.
To view the article, please visit the Benefits Canada website.
"The Primary Purpose Test"
A pension plan’s registered tax status can be revoked if the plan fails to satisfy the “primary purpose” test under the tax rules–which is certainly something no plan sponsor or beneficiary would want.