17 March 2004 External T.I. 2003-0046891E5 - Purchase of past service

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:

Can an employee purchase past service in a particular case?

Position:

The determination of whether or not an employee can purchase past service is a question of fact, which requires a review of the employer's RPP and the determination of an employer/employee relationship in a particular case.

Reasons:

Pursuant to the definition of "eligible service" in subparagraph 8503(3)(a)(i) of the Regulations, if an employee received remuneration from an employer who participates in the plan during the relevant period, the employee could purchase past service depending on the terms of the employer's RPP.

XXXXXXXXXX 2003-004689
A. St-Amour, CA
March 17, 2004

Dear XXXXXXXXXX:

Re: Purchase of past service

This is in response to your letter of June 28, 2003, addressed to the Registered Plan Division. They asked that we respond to you directly.

In your letter, you mentioned a situation where you were working on a temporary basis for a number of years (from 1995 to 1999) for the union while on a paid leave of absence with your previous employer. The union has now become your employer and you wish to purchase past service for those years. In your letter, you also mentioned that during the period in question, your previous employer paid your remuneration (which was reimbursed by the union) and did not participate in a registered pension plan (hereafter "RPP").

Our comments:

The subject matter of your letter pertains to a particular situation. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advanced income tax ruling request concerning proposed transactions and 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, any inquiries should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Revenue Agency ("CRA").

The determination of whether or not a period of employment can be considered as "eligible service" for the purposes of an RPP is a question of fact, which requires an examination of the terms of your employer's RPP and the relevant Income Tax Regulations (the "Regulations").

Subsection 8501(1) of the Regulations states the prescribed conditions for the registration of an RPP. In particular, the condition in subparagraph 8501(1)(d)(i) of the Regulations requires that the pension plan not be revocable pursuant to subsection 8501(2) of the Regulations. Paragraph 8501(2)(b) of the Regulations requires that a defined benefit plan, among other conditions, complies with paragraph 8503(3)(a) of the Regulations with respect to eligible service in order to remain on side. Subparagraph 8503(3)(a)(i) of the Regulations states that "eligible service" includes a period throughout which the member is employed in Canada by, and receives remuneration from, an employer who participates in the plan. Accordingly, under this definition there is a requirement of a continued employment relationship with an employer who pays the remuneration and participates in the plan.

For purposes of the Income Tax Act (hereafter the "Act"), the determination of whether there is an employer/employee relationship is a question of fact which can only be determined by a review of the employment contract (or other agreements setting the rights and obligations of the employer and employee), applicable employment legislations and other pertinent facts and circumstances surrounding a particular situation.

Under subsection 248(1) of the Act, "employed" means performing the duties of an office or employment; "employment" means the position of an individual in the service of some other person (including Her Majesty of a foreign state or sovereign) and "servant" or "employee" means a person holding such a position; and "employee" includes officer. The CRA relies on the basic tests developed by the courts in making this determination. In Weibe Door Services Ltd. 1987 DTC 5025 (FCA), the court mentioned that the tests consist of the control test, the integration test, the economic reality test and the specified results test. In Viau 1986 DTC 1437 (TCC), the court said that someone can "hold a position" within the meaning of the Act without actually working and it is neither unusual nor infrequent that one can remain employed without actually working. In Henderson 1991 DTC 1116 (TCC), the court considered whether the taxpayer was in "employment" as defined in subsection 248(1) of the Act. For that purposes, it was stated that "to be in service of some other person" means that the employee has a duty to serve that other person who in turn has a right to those services pursuant to a contract of mutual rights and duties.

From the information provided, we cannot determine whether or not there is an employer/employee relationship during the relevant period with your previous employer or with the union. However, you may wish to discuss this matter with officers of your local tax services office who generally review factual situations concerning employer/employee relationships for CPP and EI purposes.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA.

Yours truly,

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