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: Whether an employee's previous employer would be considered a "person related to the employer" by reason of subparagraph 60(j.1)(v).
Position: Question of fact. Depends on whether the employee is entitled to benefits under the current employer's plan which relate to all or a portion of the years of service with the former employer.
Reasons: Pursuant to subparagraph 60(j.1)(v), an employee's previous employer would be considered a "person related to the employer" if the employee's prior service with the former employer is "recognized" in determining the employee's pension benefits.
J. Gibbons, CGA
March 22, 2004
Re: Retiring Allowance Transfer under Paragraph 60(j.1)
This is in response to your letter dated December 22, 2003, wherein you requested clarification regarding the deduction under paragraph 60(j.1) of the Income Tax Act (the "Act"). Under this provision, an individual is entitled to a deduction, subject to the limit under subparagraph (ii) thereof, for the amount of retiring allowance included in income to the extent that it is transferred to a registered pension plan ("RPP") or a registered retirement savings plan ("RRSP"). More specifically, you wish to know whether an employee's previous employer would be considered a "person related to the employer" for purposes of calculating the limit under subparagraph 60(j.1)(ii).
Some employees of XXXXXXXXXX (the "Employer") have previous service with another employer XXXXXXXXXX Also, in some cases, a previous employer has a reciprocal agreement XXXXXXXXXX such that an employee's previous service with the previous employer is recognized as transferable to the employee's current pension plan (e.g., XXXXXXXXXX, etc.). In either case, the previous service is "recognized" by XXXXXXXXXX and the employee has the option of transferring the service XXXXXXXXXX. In some cases, an employee will forgo this option and instead retain his or her pension rights under the former employer's pension plan.
As we understand it, it is your view that previous service which is "recognized" by XXXXXXXXXX should be included in the calculation of the amount of the retiring allowance eligible for transfer to an RRSP (unless the employee received a retiring allowance from the previous employer). However, you wish to know whether:
1. An employee's service with a previous employer prior to 1996, where that service is not recognized by XXXXXXXXXX, can be used in the calculation of the amount of a retiring allowance eligible for an RRSP transfer?
2. An employee's service with a previous employer which has no pension plan can be used in the calculation of the amount of a retiring allowance eligible for RRSP transfer?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.
Under subparagraph 60(j.1)(ii) of the Act, the deduction for a transfer of a retiring allowance to an RRSP or RPP is limited to the total of:
a) $2,000 times the number of years before 1996 during which the retiree was employed by the employer or a person related to the employer; and
b) $1,500 times
(i) the number of years before 1989 during which the retiree was employed by the employer or a person related to the employer
(ii) the equivalent number of years before 1989 in respect of which contributions to a pension plan or a deferred profit sharing plan by the employer or a person related to the employer vested in the retiree at the time the retiring allowance is paid.
Related persons are defined in subsection 251(2) of the Act. Under subparagraph 251(2)(c)(i), related persons include corporations controlled by the same person or group of persons. In this regard, it is our general position that employers that are controlled by Her Majesty in Right of a province will be related to one another. Whether or not two employers are controlled by Her Majesty in Right of a province is a question of fact. In this regard, it is our view that control of corporations without share capital is normally exercised by the persons or persons who have the power to choose the "Board of Directors." Thus, it is our view that municipalities located in a province would not ordinarily be considered to be controlled by the province since the province does not have the power to choose the members of the municipal council. In regard to the scenarios presented in your letter, the determination of whether the Employer is related to other employers because of common control by the Province of XXXXXXXXXX would require a careful review of all the facts and circumstances, including the respective charters or by-laws.
In your letter, you referred to subparagraph 22(b)(ii) of Interpretation Bulletin IT-337R4, Retiring Allowances, which indicates that a person related to the employer includes not only those persons related under section 251 of the Act but also includes, by virtue of subparagraph 60(j.1)(v) of the Act, "any previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits." In our view, an employee's prior service with a former employer is "recognized" for purposes of subparagraph 60(j.1)(v) only if the employee is entitled to benefits under the current employer's plan which relate to all or a portion of the years of service with the former employer. The fact that an employee has the right to transfer pension amounts from a former employer (or alternatively may purchase past service in respect of former employment) is not sufficient in this regard. Rather, the employee has to actually exercise his or her right to transfer the prior service to the current pension plan. It should also be noted that the fact that two plans may be administered by the same entity does not cause two employers to be related under subparagraph 60(j.1)(v).
Based on the foregoing, in the situation where XXXXXXXXXX "recognizes" an employee's prior service, it is not necessarily correct to conclude that such service may be included in the calculation of the limit under subparagraph 60(j.1)(ii) by reason of subparagraph 60(j.1)(v). Rather, subparagraph 60(j.1)(v) will apply in a situation only if the prior service is actually recognized by the Employer's pension plan. Thus, where an employee retains his or her right to pension benefits from a former employer, or where an employee's former service is not actually recognized under the Employer's pension plan, subparagraph 60(j.1)(v) would not apply to cause the Employer to be related to the former employer.
We trust that these comments will be of assistance.
Roberta Albert, C.A.
Financial Industries Division
Income Tax Rulings Directorate
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