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:
1) Can a period of pre-1990 past service being purchased under an RPP be considered as being "while not a contributor" if the benefit accrual was previously forfeited for a return of contributions?
2) Does the deductibility of the pre-1990 past service contributions depend upon the individual's Earned Income?
Position:
1) NO
2) NO
Reasons:
1) The legislation is clear in differentiating based on whether or not the taxpayer contributed to a registered pension plan. Nothing in the Act would alter that differentiation based on whether the member has left the plan before vesting.
2) The amount is deductible under 8(1)(m) in computing the taxpayer's income from an office or employment, subject to 147.2(4).
XXXXXXXXXX 2001-008476
P. Kohnen, CMA
July 9, 2001
Dear XXXXXXXXXX:
Re: Tax Treatment of Past Service Pension Contributions
This is in reply to your letters of January 5, and March 19, 2001, addressed to the Surrey Tax Centre, requesting our views regarding the appropriate tax treatment of your situation. Your letters were referred to our directorate by the Surrey Tax Centre on May 15, 2001.
In your letter, you have outlined an actual fact situation related to completed transactions. We must advise you that the review of completed transactions falls within the responsibility of tax services offices. Consequently, we can only provide you with the following general comments which we trust will be of assistance.
The deductibility of employee contributions to a registered pension plan is differentiated between contributions in respect of service credited for years after 1989 (post-reform service) and service credited for pre-1990 years (pre-reform). Where the agreement to buy back the pre-1990 years is entered into after March 27, 1988, deductibility is further differentiated in respect of each calendar year or portion thereof purchased, based on whether or not the employee was a contributor to any registered pension plan in that year.
Where the contribution is in respect of service before 1990 while a contributor, the limit on the amount deductible under the Income Tax Act (the "Act") is more restrictive than the limits in respect of contributions for service after 1989 or for service before 1990 while not a contributor. The rationale for this is that the rules are meant to not only limit the accrual of pensionable service (as your letter notes), but also to limit the total amount of tax-sheltered contributions in respect of a year.
In situations where a taxpayer is purchasing service in respect of past service years while a contributor under a registered pension plan, that taxpayer has most likely received the tax benefit of a deduction for their contributions made to the plan when they first worked for the employer who participates in the plan. When they left that employer and received a return of their contributions, they had the opportunity to transfer the amount to their registered retirement savings plan on a tax-deferred basis.
As we discussed in our recent telephone conversation (XXXXXXXXXX/Kohnen), the more restrictive treatment regarding deductibility for the purchase of pre-1990 past service while a contributor is in recognition of the above opportunity the individual had to tax shelter their original plan contributions. Accordingly, a strict interpretation of the term "while a contributor" is appropriate when determining the deductibility of employee contributions in respect of pre-1990 service.
It was noted during our conversation that you have proceeded with your past service purchase by using existing additional voluntary contributions (AVCs) in your pension plan, and by transferring the balance needed to fund your purchase from your registered retirement savings plan. However, you did express a concern that you would have been unable to deduct your contributions due to insufficient earned income in future years.
It should be noted that, had you contributed to your plan in respect of the past-service purchase, those contributions would have been deductible subject to the limits in paragraph 147.2(4)(c) of the Act. Any excess not deductible in a given year could be carried forward to be deductible in future years.
The entitlement to such a deduction would not be contingent upon having sufficient earned income in the future years, but would be subject in any given years to the annual limit in paragraph 147.2(4)(c) of the Act.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at (613) 957-2093 if you have any further questions or concerns.
Yours truly,
Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
c.c. Bruce Scott
Surrey Tax Centre
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