29 October 2015 External T.I. 2015-0589051E5 F - Pension income splitting and bankruptcy -- translation

Principal Issues: Whether a joint election, as defined in subsection 60.03(1), can be made by a pensioner and a pension transferee where (1) the pensioner has become a bankrupt during a calendar year or (2) the pension transferee has become a bankrupt during a calendar year.

Position: Yes, in both situations.

Reasons: Subsection 128(2) does not exclude the joint election under section 60.03, nor the inclusion or deduction pursuant to paragraphs 56(1)(a.2) and 60(c). Because the split-pension election relates to the taxation year, it is possible for a pensioner and a pension transferee to jointly elect for each of his or her pre-bankruptcy and post-bankruptcy taxation years, providing the conditions stated in section 60.03 are met. If the pensioner becomes a bankrupt in a year, the split-pension amounts deducted on the returns filed for the pre-bankruptcy and/or the post-bankruptcy taxation year(s) of the pensioner pursuant to paragraph 60(c) must be reported as income on the pension transferee’s return for the calendar year, according to paragraph 56(1)(a.2). If the pension transferee becomes a bankrupt in a year, the split-pension amount deducted by the pensioner should be apportioned between the pre-bankruptcy and the post-bankruptcy taxation years of the pension transferee, based on the eligible pension income received in each taxation year. In such a situation, the split-pension amount that relates to the post-bankruptcy taxation year of the pension transferee will generally be reported on the return filed by the bankrupt under paragraph 128(2)(f).

XXXXXXXXXX 2015-058905
Marie-Claude Routhier
LL.B., D.D.N., M. Fisc.

October 29, 2015

Subject: Splitting pension income and bankruptcy of an individual

This letter is in response to your correspondence of May 27, 2015 in which you requested our view on the application of section 60.03 of the Income Tax Act ("Act") with respect to an individual who is bankrupt and is subject to the rules in subsection 128(2) of the Act.

In this regard, you described the situation of two spouses over the age of 65 who reside in Canada. During the calendar year 2015, Mrs. received monthly "eligible pension income" as defined in subsection 60.03(1) of the Act. She qualifies as a "Pensioner," as that term is defined in subsection 60.03(1) of the Act, while Mr. is a "Pension Transferee" within the meaning of that provision.

In this context, you wish to know our view of the rules on splitting pension income if (1) the pensioner was bankrupt as of June 1, 2015, or (2) the Pension Transferee was bankrupt as of June 1, 2015.

Unless otherwise noted, all statutory references in this document are references to the provisions of the Act in force on the date of this document.

Our Comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations. We nonetheless are prepared to provide the following general comments, which you may find useful.

Section 60.03

Under section 60.03, a pensioner and a pension transferee may make a joint election and file it with the Minister with their tax returns for the taxation year concerned in order to split eligible pension income of the pensioner for the year. As defined in subsection 60.03(1), the "split-pension amount" for a taxation year is the amount elected by a pensioner and a pension transferee in a joint election for that taxation year not exceeding the amount determined by the formula in that definition which takes account of eligible pension income of the pensioner for the taxation year. Note that the pensioner cannot produce more than one joint election for a taxation year under subsection 60.03(3).

Any amount that is a split-pension amount for a taxation year, as defined in subsection 60.03(1), may be deducted in calculating the pensioner's income for the year under paragraph 60(c). This amount is then included in computing the pension transferee's income for that taxation year, under paragraph 56(1)(a.2).

When a joint election is made pursuant to section 60.03, any amount deducted or withheld under subsection 153(1) that can reasonably be regarded as relating to the split-pension amount for a taxation year, as defined in subsection 60.03(1), is deemed by subsection 153(2) to have been deducted or withheld in respect of the pension transferee's tax for the taxation year under Part I of the Act and not on account of the pensioner's tax for the taxation year under Part I of the Act.

Subsection 128(2)

As noted in subsection 249(1), a taxation year for an individual is the calendar year. However, by virtue of paragraph 128(2)(d), where an individual has become a bankrupt, a taxation year of the individual (the "Bankrupt") is deemed to have ended immediately before the day on which the taxpayer became a bankrupt (the "Pre-Bankruptcy Taxation Year"). In addition, a new taxation year is deemed to have commenced at the beginning of the day on which the taxpayer became a bankrupt (the "Post-Bankruptcy Taxation Year").

In accordance with subparagraph 128(2)(c)(ii), income and taxable income of the Bankrupt shall be calculated as if the trustee performed its dealings in and acts respecting the assets of the Bankrupt (the "Assets of the Bankrupt") as agent acting on behalf of the latter and as if any income of the trustee from such transactions was income of the bankrupt and not of the trustee.

In accordance with paragraph 128(2)(e), where the individual was a bankrupt at any time in a calendar year, the trustee shall file a return with the Minister, on behalf of the individual, of the individual’s income for any taxation year occurring in the calendar year. In this regard, subparagraph 128(2)(e)(i) provides that the Bankrupt's income is computed as if the only income of the individual for any taxation year occurring in the calendar year was the income for the year, if any, arising from dealings in the estate of the bankrupt or acts performed in the carrying on of the business of the bankrupt by the trustee. It should be noted that the determination of the Assets of the Bankrupt and of the inclusion of the Bankrupt’s pension income in these assets is a question of fact and law that goes beyond the mandate of the Directorate and that cannot be resolved until after a full examination of all the facts, actions, circumstances and relevant documents of a particular situation.

Note that under subparagraphs 128(2)(e)(ii) and (iii), certain deductions are not allowed in computing taxable income and tax payable for the Bankrupt in the income tax return submitted by the trustee under paragraph 128(2)(e). Note also that the deduction under paragraph 60(c), pursuant to section 60.03, is not referred to in subparagraphs 128(2)(e)(ii) and (iii).

The Bankrupt must also file, in accordance with paragraph 128(2)(f), a separate return of the individual’s income for any taxation year during which the individual was bankrupt, computed as if the income required to be reported in respect of the year by the trustee under paragraph 128(2)(e) was not the income of the Bankrupt. Subparagraphs 128(2)(f)(ii), (iii) and (iv) list the deductions that are inapplicable in computing income, taxable income and the tax payable for the individual in the tax return under paragraph 128(2)(f). The deduction provided for in paragraph 60(c), pursuant to section 60.03, is not referred to in subparagraphs 128(2)(f) (ii), (iii) and (iv).

For a Post-Bankruptcy Taxation Year, the trustee is required to pay any tax determined in the income tax return filed under paragraph 128(2)(e) and the Bankrupt is required to pay any tax determined in the income tax return filed under paragraph 128(2)(f).

In the given situation, the Bankrupt, whether the Pensioner or the Pension Transferee, will have to file a tax return for the Pre-Bankruptcy Taxation Year ending May 31, 2015. For the Post-Bankruptcy Taxation Year from June 1 to December 31, 2015, two tax returns for the taxation year will generally be filed: that filed under paragraph 128(2)(e); and that filed under paragraph 128(2)(f).

Joint election for the Pre-Bankruptcy Taxation Year

For the Pre-Bankruptcy Taxation Year, we are of the view that the Bankrupt, whether the Pensioner or the Pension Transferee, may file a joint election with respect to eligible pension income, as defined in subsection 60.03(1), of the Pensioner received during the pre-bankruptcy period, on the terms set out below.

(a) The Pensioner is bankrupt

In the situation where the Pensioner is bankrupt, the split-pension amount will take into account only the eligible pension income of the Pensioner received during the taxation year ending May 31, 2015, that is, five months of eligible pension income. The split-pension amount for that taxation year may be deducted by the Pensioner under paragraph 60(c), in her tax return for the taxation year ending May 31, 2015. This amount will be included in the computation of the Pension Transferee’s income for his 2015 taxation year, pursuant to paragraph 56(1)(a.2).

(b) The Pension Transferee is bankrupt

In the situation where the Pension Transferee is bankrupt, the split-pension amount will take into account the eligible pension income of the Pensioner received during her taxation year, that is, the 2015 calendar year. The split-pension amount for this taxation year will be deducted by the Pensioner under paragraph 60(c), in her income tax return for her 2015 taxation year. This amount will be included in the computation of the Pension Transferee's income under paragraph 56(1)(a.2) in proportion to the amount of eligible pension income received by the Pensioner during each taxation year of the Pension Transferee included in the 2015 calendar year, being five months of eligible pension income for the Pre-Bankruptcy Taxation Year of the Pension Transferee.

Joint election for the Post-Bankruptcy Taxation Year

For the Post-Bankruptcy Taxation Year, we are of the view that the Bankrupt, whether the Pensioner or the Pension Transferee, may file a joint election with respect to eligible pension income, as defined in subsection 60.03(1), of the Pensioner received during the post-bankruptcy period on the terms set out below.

(a) The Pensioner is bankrupt

In the situation where the Pensioner is bankrupt, the split-pension amount will take into account only the eligible pension income of the Pensioner received during the taxation year from June 1, 2015 to December 31, 2015, being seven months of eligible pension income.

If the eligible pension income of the Pensioner received during the Post-Bankruptcy Taxation Year is fully included in the income tax return filed by the Pensioner under paragraph 128(2)(f), the split-pension income determined under subsection 60.03(1) may be fully deducted by the Pensioner under paragraph 60(c) in the income tax return filed by the latter for the taxation year ending December 31, 2015. This amount will be included in the computation of the Pension Transferee's income for his 2015 taxation year, pursuant to paragraph 56(1)(a.2).

If the eligible pension income of the Pensioner received during the Post-Bankruptcy Taxation Year is fully included in the Assets of the Bankrupt declared in the income tax return filed by the trustee pursuant to paragraph 128(2)(e), the split-pension income amount determined under subsection 60.03(1) may be fully deducted by the trustee under paragraph 60(c), in the income tax return filed for the taxation year ending December 31, 2015. This amount will be included in computing the Pension Transferee's income for his 2015 taxation year, pursuant to paragraph 56(1)(a.2).

If the eligible pension income of the Pensioner received during the Post-Bankruptcy Taxation Year is partially included in the income tax return filed by the Pensioner under paragraph 128(2)(f) and partially included in the income tax return filed by the trustee pursuant to paragraph 128(2)(e), we are of the view that the split-pension amount determined under subsection 60.03(1) can be deducted by the Pensioner and the trustee under paragraph 60(c) in the income tax return filed by each of them for the taxation year ending December 31, 2015, in proportion to the amount of eligible pension income declared in each of these returns.

(b) The Pension Transferee is bankrupt

In the situation where the Pension Transferee is bankrupt, the split-pension amount will take into account the eligible pension income of the Pensioner received during her taxation year, being the 2015 calendar year.

The split-pension amount may be deducted by the Pensioner under paragraph 60(c), in her income tax return for the taxation year ending December 31, 2015. This amount will generally be included under paragraph 56(1)(a.2) in the income tax return filed by the Pension Transferee pursuant to paragraph 128(2)(f), in proportion to the eligible pension income amount received by the Pensioner during the Pension Transferee’s Post-Bankruptcy Taxation Year.

We trust these comments will be of assistance.

Louise J. Roy, CPA, CGA
Manager
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate