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 prior service which was bought back for pension purposes can be taken into account in determining the amount of retiring allowance that can be transferred into an RRSP under paragraph 60(j.1).
Position: Yes.
Reasons: Pursuant to subparagraph 60(j.1)(v), a person related to the employer included a previous employer of the employee whose service therewith is recognized in determining the retiree's pension benefits.
XXXXXXXXXX 2005-015678
J. Gibbons, CGA
February 1, 2006
Dear XXXXXXXXXX:
Re: Transferring a Retiring Allowance to a Registered Retirement Savings Plan ("RRSP")
We are responding to your letter dated October 27, 2005, concerning the application of paragraph 60(j.1) of the Income Tax Act (the "Act") which may provide a deduction in respect of a retiring allowance that is included into income and transferred to an RRSP or a registered pension plan. More specifically, you wish to know whether employment services performed by you before 1996 for another employer and bought back by you for pension purposes can be included in the calculation of the amount of retiring allowance that can be transferred under paragraph 60(j.1) of the Act.
The facts contained in your letter are as follows:
- You have been employed with your current employer since May 1976;
- Your prior service with a different employer ("your prior service") was from December 1971 to February or March 1974; and
- You were able to buy back most of your prior service; however, you were not able to buy back the first three months of such service.
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 advance 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.
Subparagraph 60(j.1)(ii) of the Act limits the amount that may be deducted in respect of the transfer of a retiring allowance to a registered pension plan or an RRSP 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,
minus
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.
Subsection 251(2) provides a general definition of related persons for the purposes of the Act. However, as noted in paragraph 22(b) of Interpretation Bulletin IT-337R4, Retiring Allowances, subparagraph 60(j.1)(v) of the Act provides that, for the purposes of paragraph 60(j.1) of the Act, a person related to the employer includes a previous employer of the retiree whose service therewith is recognized in determining the retiree's pension benefits. In this regard, it is our position that, where the employer's pension plan recognizes any part of the years of service with a former employer, all of the years of service with the former employer can taken into account in the calculation in subparagraph 60(j.1)(ii).
It is also our position, as outlined in paragraph 22(a) of IT-337R4, that the number of years of employment need not be continuous and there is no restriction on the length of a break between periods of service. Further, the number of years during which the retiree was employed includes a part of a year as one year. However, if an employee is employed for part of a year by an employer and by a person related to the employer for part of the same year, then the two parts of the year would only count as one year.
Based on the foregoing and the fact that your prior service was recognized in determining your pension benefits, it is our view that your prior service can be taken into account for purposes of calculating the amount of retiring allowance available for transfer under subparagraph 60(j.1), adding 4 years to such calculation (where a year includes a part of a year).
We trust that these comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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