27 January 2005 External T.I. 2004-0103171E5 - Prior employer pre-reform buy back using RRSP

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.

Principal Issues: If benefits for pre-reform service under the RPP of a prior employer were commuted and transferred to an RRSP, can the individual transfer those funds from the RRSP to the RPP of his current employer to buy back those years of service?

Position: No

Reasons: Paragraph 8503(3)(e) of the Regulations provides that benefits for pre-reform service must be acceptable to the Minister. IC 72-13R8 sets out what constitutes eligible service for pre-reform years. For vested pre-reform service with a prior employer, only if a reciprocal agreement exists (rare) or if funds are transferred directly from the prior RPP to the current RPP will the service be eligible.

XXXXXXXXXX 2004-010317
Renée Shields
(613) 948-5273
January 27, 2005

Dear XXXXXXXXXX:

Re: Past Service Buy-back

This is in response to your letter of November 12, 2004 inquiring about the purchase of past service in a registered pension plan ("RPP") using funds in a registered retirement savings plan ("RRSP").

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot comment on your client's specific situation, we are prepared to provide the following general comments, which may be of assistance.

You have described a situation in which an individual (the "Taxpayer") was a member of an RPP and terminated his service with his employer in 1987. His pension benefit under the RPP was commuted and transferred to his RRSP. The Taxpayer now wishes to buy back those years of service in his current employer's RPP. You have asked whether paragraph 146(16)(a) of the Income Tax Act (the "Act") permits an individual to transfer funds from an RRSP to an RPP in such a scenario.

Paragraph 146(16)(a) of the Act states that an RRSP may provide for a transfer of property to an RPP for the benefit of the RRSP annuitant. Accordingly, only if the funds can be used to provide a permissible RPP benefit for eligible service would paragraph 146(16)(a) of the Act be satisfied.

Paragraph 8503(3)(e) of the Income Tax Regulations provide that benefits for periods before 1991 (also called "pre-reform service") must be acceptable to the Minister. In this regard, reference should be made to Information Circular 72-13R8, "Employees Pension Plans" (the "Circular"). Reference may also be made to Pension Reform Updates 92-8R, "Eligible Service" and 92-12, "Commutation and Opting out of a Pension Plan" in the Newsletter section of http://www.cra-arc.gc.ca/rpd. The rules for what types of pre-reform service can be pensionable under an RPP are set out in paragraphs 8(e)(i)-(vii) of the Circular. Specifically, pre-reform service with a prior employer can only be recognized in accordance with paragraph 8(e)(ii) or 8(e)(vi) of the Circular.

Paragraph 8(e)(ii) of the Circular applies if a reciprocal agreement exists between the employers in question. Although relatively uncommon, such agreements would provide for the movement back and forth of employees between employers without the necessity of a corresponding movement of pension assets. Reciprocal agreements must have been submitted to the CRA and approved before service was credited under a registered pension plan.

The more common situation (and the one described in your scenario) is one in which employers have agreements pertaining to the transfer of funds between their respective RPPs in the event of employee movement (called a "Portability Arrangement" in the Circular). In this case, paragraph 8(e)(vi) of the Circular is the relevant provision. In order to satisfy paragraph 8(e)(vi) of the Circular there must be a direct transfer of funds from the RPP in which the pension benefit originally accrued to the RPP which intends to recognize the service. In situations in which a plan member commuted the original RPP benefit, either by taking a cash refund or by transferring the value to an RRSP, a direct RPP to RPP transfer is no longer possible. Moving funds from one's RRSP to one's current RPP therefore does not constitute a portability arrangement. Accordingly, the service would not be eligible and no benefits can be provided for that service by the RPP of an individual's current employer. To do so would make the RPP revocable under subsection 147.1(11) of the Act.

You have also asked whether in the same situation, an individual can transfer the funds representing the commuted RPP benefit from the RRSP back to the prior employer's RPP and subsequently effect a transfer from the prior employer's RPP to the current employer's RPP. In this regard, or to more fully discuss any of these issues, we recommend that you contact officials of the Registered Plans Directorate ("RPD") of the CRA, who have the responsibility for administering these provisions. The RPD General Inquiries line telephone number is (613) 954-0419.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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