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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Will a lump-sum settlement for rights to future payments qualify for the deduction under proposed section 110.2?
Position: No.
Reasons: Proposed section 110.2 will only apply to lump-sum payments where a significant portion of the payment relates to amounts that should have been received and taxed in earlier years.
February 7, 2000
VANCOUVER ISLAND TSO HEADQUARTERS
Bruce Donaldson M.P. Sarazin
Acting Director (613) 824-5441
Attention: Bonnie Hilland
1999-001380
XXXXXXXXXX
We are writing to you in response to your facsimile dated December 3, 1999, wherein you requested our comments regarding the taxation of proposed payments to the above-noted taxpayer. You asked us to respond directly to the taxpayer's accountant but we are unable to do so without the taxpayer's written authorization.
Under plans that were established by the taxpayer's employer in XXXXXXXXXX, the taxpayer has rights to receive a stream of payments after his retirement. There was no formal contract or agreement between the employer and the participants in the plans. The accountant's letter states that the employer and other employers in the same industry contributed funds to the plans, the participants did not contribute to the plans and the plans were designed to allow the employers to provide unfunded retirement benefits for their employees. We note that it is difficult to accept that the plans are unfunded when the employer is required to make contributions to the plans. The determination of whether the plans were unfunded or funded is important in determining how the amounts received under the plan will be taxed in the hands of the taxpayer.
The taxpayer has been given the right to receive lump-sum payments of $XXXXXXXXXX and $XXXXXXXXXX, respectively, for giving up his rights to payments under the plans. The employer has advised the taxpayer that the lump-sum payments would be included in the recipient's income in the year received and the amounts are not eligible for rollover to tax-deferred plans (registered retirement savings plans, registered retirement income funds, registered pension plans or deferred profit sharing plans) under the Income Tax Act (the "Act").
The taxpayer is concerned about the future existence of the employer and would like to reduce any risks associated with the rights under the plans by accepting the lump-sum payments. The taxpayer's accountant has asked whether the lump-sum payments would qualify for the deduction under proposed section 110.2 described in Legislative Proposals and Explanatory Notes Relating to Income Tax published by The Honourable Paul Martin, P.C., M.P. Minister of Finance (September 1999).
The proposed section 110.2 is being enacted to apply to retroactive lump-sum payments where a significant portion of the lump-sum payment should have been received and taxed in prior years. In the above situation, it is clear that the lump-sum payments relate to rights to future payments under the plans and do not relate to amounts that should have been received and taxed in prior years. Consequently, the provisions of proposed section 110.2 will not apply to the lump-sum payments.
The employer has stated that the amount would be reported and taxed in the year of receipt and the amounts are not eligible for rollover to an RRSP or other tax deferred plan. Since there are no details relating to such plans and the information provided by the accountant is inconsistent, we are not able to provide any comments with respect to the treatment of such income for purposes of the Act.
We enclose the copy of the accountant's facsimile of November 30, 1999, for your action.
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content