26 August 2005 External T.I. 2005-0138861E5 - Reimbursement of Pension 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: Where an employee pays the full cost to buy-back pensionable service and the employer later reimburses the employee for one half of the cost to buy-back the service, how will the reimbursement be reported for tax purposes?

Position: Income from employment.

Reasons: Where the terms of an RPP provide that the obligation to pay the employer's share of the contributions to buy-back pensionable service rests with the employee and the employer reimburses the employee, it will be a taxable benefit to the employee.

XXXXXXXXXX 2005-013886
G. Allen
August 26, 2005

Dear XXXXXXXXXX:

Re: Reimbursement of Pension Buy-Back

This letter is in response to your letter dated June 23, 2005 wherein you enquire how amounts reimbursed by an employer to an employee, in respect of the buy-back of pensionable service by employees, are to be reported for income tax purposes.

In your letter, you indicate that prior to an employee's retirement, the employee may buy-back the employee's probation period, which was not pensionable service at the time of the employee's probation. However, prior to the employee retiring, the employer will reimburse the employee fifty percent of the cost to buy-back this pensionable service.

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 CRA. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

Our Comments

Where the terms of a registered pension plan ("RPP") require an employee to pay both the employer's and the employee's portions of the required contributions, in respect of a period of eligible service under a RPP, any subsequent reimbursement by the employer to the employee of the contributions would be included in the employee's income as income from employment. The reimbursement by the employer will be employment income whether the employee has terminated or remains employed by the employer. It should also be noted that the full amount of the employee's contribution to the RPP will generally be deductible by the employee.

Furthermore, paragraph 153(1)(a) of the Act requires that every person paying at any time in a taxation year salary, wages or other remuneration shall deduct or withhold tax from the full amount of the payment. CPP and EI deductions must also be withheld on the full amount of salary or wages paid by an employer to an employee.

Information on your responsibility to deduct CPP contributions, EI premiums, and income tax from the salary or wages you pay to your employees is discussed in Chapter 1 of our publication T4001 - Employers Guide - Payroll Deductions - Basic Information ("T4001"). A copy of T4001 can be found on our website at www.cra-arc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
Manager
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch