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:
How is 60(j.1) applied to calculate how much of a retiring allowance can be transferred to the employee's RRSP?
Position: General information provided.
Reasons:
Previous positions taken and the application of the legislation to the examples provided.
XXXXXXXXXX 2003-001668
Renée Shields
(613) 948-5273
July 8, 2003
Dear XXXXXXXXXX:
Re: Retiring Allowance transfer to Registered Retirement Savings Plan
This is in response to your letter of April 29, 2003 wherein you request our assistance in determining the amount of a retiring allowance ("RA") that would be eligible for transfer to an employee's registered retirement savings plan ("RRSP") ("Eligible Amount").
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 retiring allowances are contained in Interpretation Bulletin IT-337R3, "Retiring Allowances." In particular we draw your attention to paragraphs 12 and 13 in IT-337R3, which contain a detailed discussion and examples regarding the calculation of the Eligible Amount.
Paragraph 60(j.1) of the Income Tax Act (the "Act") allows an individual to transfer portions of an RA to an RRSP (or to a registered pension plan) on a tax-deferred basis. The amounts that can be transferred are equal to $2,000 for each year of employment with the payer of the RA before 1996 and an additional $1,500 for each year of employment before 1989 as long as no pension benefits from the employer have vested in the employee for those years. The number of years of employment need not be continuous. Furthermore, where an employee is employed during any part of a calendar year, that partial calendar year can be counted as a full year in determining the total number of years of service.
The years of service that may be counted are years of service with the employer or with a "person related to the employer". It is a question of fact whether a person is "related to an employer". There are, however, provisions in the Act that define certain relationships for purposes of the "related to" concept.
Section 251 of the Act discusses the meaning of "arm's length" and states that "related persons" are deemed not to deal at arm's length. Subsection 251(2) of the Act defines "related persons" for purposes of the Act. Paragraph 251(2)(c) states that two corporations will be related to one another if they are controlled by the same person or group of persons. You may refer to Interpretation Bulletin IT-419R "Meaning of Arm's Length" for additional information in this regard.
A person may also be related to an employer by virtue of the extended meaning in subparagraphs 60(j.1)(iv) and (v) of the Act. Subparagraph 60(j.1)(iv) of the Act provides that a person is related to an employer if the employer acquired or continued that person's business. Subparagraph 60(j.1)(v) of the Act permits a former employer to be considered to be related where service with the former employer is recognized under the current employer's pension plan. In these circumstances, the years of service with both employers may be considered for purposes of paragraph 60(j.1) of the Act. This position will also apply where service with both employers is recognized under the same pension plan.
We note that subparagraph 60(j.1)(v) of the Act will not apply where the employee has accrued service under one plan, but has not transferred the service to the current plan and, instead, will be receiving benefits separately out of each plan. The fact that two plans may be administered by the same entity does not cause the two employers to be related in accordance with subparagraph 60(j.1)(v) of the Act.
You have requested clarification regarding the determination of the Eligible Amount in four different situations. As these examples appear to reflect actual completed transactions, we must stress that our comments are not binding on the CCRA.
Whether an amount paid is an RA is a question of fact to be determined on a case-by-case basis. For purposes of this discussion, we have assumed that the amounts so qualify. Your examples suggest that the RA is paid by a specific employer ("the Specific Employer") but that the individuals were employees of other employers, which service is recognized in the computation of the RA. We have not addressed the nature of this arrangement or the relationship between the Specific Employer and the various other employers referred to in your letter. As noted, we have assumed that the amounts paid qualify as an RA. The Specific Employer and the other employers are referred to collectively as "Employer" in this commentary.
Finally, please also note that for purposes of this discussion, we have assumed that no reduction is required pursuant to clauses 60(j.1)(ii)(C)(C.1) or (D) of the Act for deductions taken by the employee in a previous year for any RA.
Example 1
Eighteen years of the employee's employment with the Employer (from 1978 to 1995) would be included in the calculation of the Eligible Amount. It would be a question of fact whether the previous employer is related to the Employer by virtue of any of the definitions described above. If it is determined that the employers are related, then it is possible that an additional thirteen years (1965 to 1977) can be included in the Eligible Amount calculation.
Please note that if the employers are related by virtue of subparagraph 60(j.1)(v) then only those calendar years for which service with the prior employer is being recognized can be included. Your letter indicates that service under the previous employer's pension plan "can" be recognized under the Employer's plan. As indicated above, to be considered to be "related" pursuant to subparagraph 60(j.1)(v) of the Act, the individual must have actually transferred their service to the Employer's pension plan.
Because a pension benefit has vested in the employee for all years of employment with the Employer, these eighteen years are included at $2,000 each pursuant to Clause 60(j.1)(ii)(A) of the Act, for a total of $36,000. Since we assume pension benefits are vested for the additional thirteen years of employment with the previous employer, they would be included at $2,000 each.
Example #2
Ten years of the employee's employment with the Employer (from 1986 to 1995) can be included in the Eligible Amount calculation. We understand that the employee has never participated in the Employer's pension plan and therefore has no pension entitlement for 1986, 1987 or 1988. Accordingly, pursuant to clause 60(j.1)(ii)(A) and (B) of the Act, these three years can be included at $3,500 each. The remaining 7 years can be included at $2,000 each for a total Eligible Amount of $24,500.
Because the employee does not participate in the Employer's pension plan, your letter indicates that you have no prior service history for the employee. If you wish to determine whether any years of prior employment can be included in the Eligible Amount calculation, you would have to verify with the employee whether he ever worked for another employer that is related to the Employer.
Example #3
Eighteen years of the employee's employment with the Employer (1978-1995) would be included in the calculation of the Eligible Amount.
In your example, only a partial year of service was credited in 1978. Where service is credited and will result in a pension benefit of any amount in respect of a particular year, we consider that employer contributions have vested in respect of that year of service and the $1,500 cannot be counted for that year. As indicated in paragraph 13(c) of IT-337R3, the number of years for which an employer has made pension contributions cannot be fractional. Since pension benefits related to 1978 are vested in the individual, our position is that 1978 is included at $2,000 and not at $3,500.
In this example, therefore, 18 years would be included at $2,000 for a total of $36,000.
Example #4
In this example, the employee has transferred his service with a prior employer to the Employer's pension plan. This means that the prior employer is related to the Employer pursuant to subparagraph 60(j.1)(v) of the Act. Accordingly, fifteen years of employment with the Employer (1981 - 1995) and twenty years of employment (1961-1980) with the related employer can be included in the Eligible Amount calculation. Since a pension benefit has vested for all years of service prior to 1989, each year would count for $2,000 for a total of $70,000.
Your final question deals with the transfer to an employee's RRSP of that portion of the RA in excess of the Eligible Amount (up to the employee's RRSP deduction limit). You are correct that the RRSP carrier would issue a receipt for this contribution, as it would for the Eligible Amount transferred to the RRSP. The amount in excess of the Eligible Amount would be noted in Box 27 "Non-eligible retiring allowances" of the T4A slip issued to the employee. You may refer to CCRA publication RC4157 entitled "Deducting Income Tax on Pension and Other Income, and Filing the T4A Slip and Summary Form" in this regard.
We trust that these comments will be of assistance.
Yours truly,
Mickey Sarazin, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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