9 September 2004 External T.I. 2004-0092601E5 - RRSP -PAR and contributions

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: The taxpayer terminated employment in 2003 and assumed his pension adjustment reversal ("PAR") would be calculated in 2003. He accordingly estimated the PAR and made a contribution to his RRSP. The PAR was actually reported in 2004 and the Taxpayer's claim for RRSP contributions 2003 was disallowed. He has asked that the contribution be allowed as there was undue delay by the pension in reporting the PAR.

Position: The deduction cannot be allowed

Reasons: This is a common error. The PAR is calculated when the employee's participation in the pension is terminated, not when the employee's employment is terminated. Participation in an RPP is terminated when all benefits are calculated and distributed. In this case this occurred in 2004. Hence, the employee did not have the amount of unused room in 2003 that he thought he had. There is no relief available under the Act that specifically addresses this situation. However, it should be noted that the contributions disallowed in 2003 are fully deductible in 2004 so the tax consequences should be minimal.

PARs must be reported within specified periods after a termination occurs. However the Act does not set out a specific time frame in which benefits must be paid out after a participant makes a request. Nevertheless, the RPP may provide such rules. Accordingly, the member would have to look to the plan administrator and/or the former employer for compensation for any inappropriate delay.

XXXXXXXXXX 2004-009260
W. C. Harding
September 9, 2004

Dear XXXXXXXXXX:

Re: Pension Adjustment Reversal ("PAR") Reporting and Contributions to an RRSP

This is in reply to your letter of June 16, 2004, in which you requested an adjustment of your 2003 income tax return in respect of registered retirement savings plan ("RRSP") contributions that were disallowed as a deduction in computing your income for 2003.

As we understand your situation, you terminated your employment with your former employer in XXXXXXXXXX 2003 and, shortly thereafter, reached an agreement with respect to the payment of a severance allowance to you (or to your RRSP). We also understand that, in 2003, you requested information concerning the options available with respect to the payment of pension benefits under your former employer's registered pension plan ("RPP") and that, at some time thereafter, you elected to have these benefits transferred to a locked-in RRSP. The actual transfer of $XXXXXXXXXX was then completed in XXXXXXXXXX 2004. In XXXXXXXXXX 2004, you received a form T10 indicating that your pension adjustment reversal for 2004 was $XXXXXXXXXX.

We also understand that, shortly before the deadline for making RRSP contributions for 2003 (March 1, 2004), you determined that your PAR would be approximately $XXXXXXXXXX and that, as a consequence, you could contribute additional amounts to you RRSP. Based on the copy of the notice of assessment you provided, it is our understanding that you contributed and claimed a deduction for $XXXXXXXXXX for RRSP contributions in 2003.

Finally, we understand that your RRSP deduction was reduced to $XXXXXXXXXX on the initial assessment, but that it was subsequently increased to $XXXXXXXXXX on a subsequent reassessment. It appears that this latter adjustment was made to allow a deduction in respect of the severance payments received in 2003.

The disallowance of the full amount of your claim was made because it exceeded the maximum allowed for 2003. This maximum was based on your normal RRSP contribution room for 2003 plus the amount allowed for the transfer of your severance payment to an RRSP. It did not include the amount of the PAR computed at the time your membership in the RPP was terminated as the PAR could only be computed when the benefits were transferred to your RRSP in 2004.

Neither the Income Tax Act nor the Income Tax Regulations provide specific directions in respect to the time taken to process the distribution of the benefits from an RPP as such distributions are generally made at the direction of the participant. Nevertheless, an RPP may provide specific rules in this respect. Accordingly, you may wish to review this matter with your former employer and the administrator of the RPP.

We would also like to note that the PAR reported to you in 2004 will increase the unused RRSP contribution room available in 2004 with the result that the contributions disallowed in 2003 may be claimed in 2004. We would also note that RPP benefits transferred directly to an RRSP, if properly made, are not included in a recipient's income and are not treated as a contribution to an RRSP. Accordingly, based on the information provided, and assuming the RPP administrator correctly computed your PAR, you do not have to reduce the PAR by the amount of the benefits that were transferred to your RRSP in 2004 when you compute your 2004 unused contribution room.

Copies of your letter and our reply have been provided to Ms. Marlene Hanson, Appeals Manager of the Hamilton Tax Services Office. Should you wish to discuss the reassessments of your 2003 income tax return, Ms. Hanson may be reached at (905) 570-7393.

We trust our comments will be of assistance to you.

Yours truly,

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

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