5 November 2003 External T.I. 2003-0029455 - TAXATION OF PENSION SHORTFALL PAYMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Can an individual's former employer deposit an amount, representing the current value of his remaining entitlement under a registered pension plan ("RPP"), into his registered retirement savings plan ("RRSP")?

Position:

The amount will be a taxable benefit under 56(1)(a)(i). However, direct transfer of an amount directly from the RPP to the RRSP pursuant to subsection 147.3(4), subject to the prescribed amount rules, will be possible.

Reasons:

The amount paid is clearly tied to a benefit under the RPP. The employer/administrator has conceded that the original RPP payout to the individual was miscalculated. This clear link suggests that the amount is more appropriately characterized as a 56(1)(a)(i) pension/superannuation amount than as "damages."

2003-002945
XXXXXXXXXX Renée Shields
(613) 948-5273
November 5, 2003

Dear XXXXXXXXXX:

Re: Taxation of an Amount Representing Pension Entitlement

This is in response to your letter of July 4, 2003 inquiring whether your former employer can deposit an amount, representing the current value of your remaining entitlement under a registered pension plan ("RPP"), into your registered retirement savings plan ("RRSP").

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

The CCRA's general views regarding transfers from RPPs to other registered plans are contained in Interpretation Bulletin IT-528, "Transfers of Funds Between Registered Plans."

We understand that in 1989 you terminated employment with your former employer and received a lump sum payment from the company's defined benefit RPP. You have succeeded in demonstrating to your former employer that the amount you received did not represent your full entitlement under the RPP. In recognition of this, you will be receiving a lump sum representing the current value of the portion of your RPP entitlement you did not receive in 1989. You have asked whether this amount can be deposited into your RRSP.

When an individual receives either a lump sum or periodic payment that is attributable to a superannuation or pension benefit, the amount is included in the individual's income in the year of receipt pursuant to paragraph 56(1)(a) of the Income Tax Act (the "Act"). It is our position that payment of an amount representing the balance owed to an individual due to a prior miscalculation of the individual's RPP entitlement falls within paragraph 56(1)(a) of the Act. This would be the case whether the amount is paid from the RPP or directly by the former employer.

However, as noted in paragraph 15 of IT-528, subsection 147.3(4) of Act permits the direct transfer of a single amount from an RPP to an RRSP where no portion of the amount relates to an actuarial surplus and the amount does not exceed a prescribed amount calculated in accordance with section 8517 of the Income Tax Regulations (the "Regulations"). Although not a required form, form T2151, "Direct Transfer of a Single Amount under Subsection 147(19) or Section 147.3" may be used to record the transfer from an RPP to an RRSP.

Section 8517 of the Regulations defines prescribed amount as the product of the amount of the lifetime retirement benefits (LRBs) commuted (i.e. the annual amount by which the individual's LRBs under the RPP are reduced as a result of the lump sum payment) multiplied by the present value factor that corresponds to the age of the individual at the time of the transfer determined by reference to the table in the section.

The amount in excess of the section 8517 prescribed amount (the "Excess Amount") must be included in the recipient's income by virtue of paragraph 56(1)(a) of the Act and is subject to withholding tax in the year the amount is paid.

We note that as discussed in T4001, "Employers' Guide - Payroll Deductions (Basic Information)," where an employer withholds an RRSP contribution directly from an employee's remuneration and certain conditions are met, no tax must be withheld from the amount so contributed. This treatment will apply to an Excess Amount to the extent that the RPP administrator has evidence of a recipient's available RRSP contribution room.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch