25 October 2004 External T.I. 2004-0077651E5 - Transfer of retiring allowance to RRSP

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: 1) Application of 60(j.1) in determining how much of a retiring allowance can be transferred to the employee's RRSP.

2) How to correct an error where the Employer understated the amount of retiring allowance eligible for transfer to the employee's RRSP in a prior year and whether there is any administrative relief available to the employee who may wish to make a contribution to his RRSP equivalent to the amount of the understatement now that the statutory time limit to make the contribution has passed.

Position: 1) Paragraph 60(j.1) allows an individual to transfer portions of a retiring allowance to an RRSP 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 retiring allowance 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. The years of service that may be counted are years of service with the employer or with a "person related to the employer".

2) Referred the administrative issues to Client Services Directorate.

Beth Beange
Export Development Canada
151 O'Connor Street. 						2004-007765
Ottawa ON  K1A 1K3						C. Lalonde

October 25, 2004

Dear Ms. Beange:

Re: Eligible Component of a Retiring Allowance

This is in response to your electronic message of May 21, 2004 wherein you request our assistance in determining the amount of a retiring allowance that would be eligible for transfer to an employee's registered retirement savings plan ("RRSP") (the "Eligible Amount").

You provided an example whereby an employee with 9 years of employment with a former employer (from 1971 to 1979) was subsequently hired by another employer (the "Employer") in 1980 under conditions which recognized his prior service with the former employer. The employee retired in 2003 with 23 years of service. Pension benefits from the two employers have vested in the employee for the 32 years of service.

You also asked how to correct an error where an employer understated the Eligible Amount in a prior year and whether there is any administrative relief available to the employee who may wish to make a contribution to his RRSP equivalent to the amount of the understatement now that the statutory time limit to make the contribution has passed.

Our comments

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. Where the particular transactions are completed the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments which may be of assistance.

Paragraph 60(j.1) of the Income Tax Act (the "Act") allows an individual to transfer portions of a retiring allowance to an RRSP (or to a registered pension plan) on a tax-deferred basis. Basically, the Eligible Amount that can be transferred is equal to $2,000 for each year of employment with the payer of the retiring allowance 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.

The CRA's general views regarding retiring allowances are contained in Interpretation Bulletin IT-337R4, "Retiring Allowances." In particular we draw your attention to paragraphs 19 and 20 in IT-337R4, which contain a detailed discussion and examples regarding the calculation of the Eligible Amount.

With respect to the example you provided, if the employee has transferred his service with the prior employer to the Employer's pension plan, the prior employer would be related to the Employer pursuant to subparagraph 60(j.1)(v) of the Act. Accordingly, sixteen years of employment with the Employer (1980 - 1995) and nine years of employment (1971-1979) with the related employer can be included in the Eligible Amount calculation; each year would count for $2,000 for a total of $50,000. Since a pension benefit has vested for all the years of service, the employee would not be eligible for the additional $1,500 for each year of employment prior to 1989.

It should be noted that the Eligible Amount will have to be reduced by any retiring allowance previously transferred to an RRSP upon the employee's departure from his first employment. Clause 60(j.1)(ii)(C) of the Act does provide for a reduction but only where a deduction was previously made under paragraph 60(j.1). Since the application of paragraph 60(j.1) is limited to retirements occurring after November 12, 1981, any such previous transfer by the employee who, in this example previously retired in 1979, would have been made before that time and, thus, no such reduction is required. This reduction would need to be considered in another example where the previous retirement was after November 12, 1981.

The bulletin mentioned above is available from your local tax services office or on the Internet at: http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

With regard to the correction of an Eligible Amount previously reported by an employer and the possible application of administrative relief to an employee who may wish to make a contribution to his/her RRSP of an amount equivalent to the understated Eligible Amount after the statutory time limit, we have discussed your correspondence with officials of the Assessment and Client Services Branch of the Canada Revenue Agency. At their request, we have forwarded your submission to their attention so that they may reply to you directly. You may contact Mr. Rick Owen of the Client Services Directorate, Assessment and Client Services Branch, at (613) 957-9356.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch

c.c. Rick Owen

Senior Programs Officer
Individual Programs Section