27 April 2006 Internal T.I. 2005-0161401I7 - Deduction of employer RPP 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: Can an employer establish an RPP with an effective date of January 1, make an eligible contribution for past service before April 30 and deduct the contribution as an expense in the previous year

Position: Yes

Reasons: Interpretation of the legislation.

							April 27, 2006

	HEADQUARTERS				HEADQUARTERS
	Registered Plans Directorate		Income Tax Rulings
	Actuarial Division			   Directorate
							Renée Shields
	Attention:  Janice Laird, Director	(948-5273)

							2005-106140

Employer deduction for past service contributions

This is in response to an email received from Shanour Remtoulah on November 29, 2005 regarding the interpretation of subsection 147.2(1) of the Income Tax Act (the "Act").

The interpretive issue is best described by a hypothetical situation. We will assume that effective January 1, Year 2, an employer establishes a registered pension plan ("RPP"), which provides both current and past service benefits. Within the first 120 days of Year 2, the employer funds the past service benefits by making an eligible contribution, as defined in subsection 147.2(2) of the Act. The question posed is whether pursuant to subsection 147.2(1) of the Act, the employer would be permitted to deduct the contribution as an expense in Year 1.

Paragraph 20(1)(q) of the Act permits an employer to deduct RPP contributions as an expense from business income in such amount as is permitted by subsection 147.2(1) of the Act. Subsection 147.2(1) of the Act sets out various requirements that must be met in order for an employer to deduct the contribution as an expense from business income in a particular year (the "Taxation Year"). Generally speaking, these requirements are:

• The contribution is made by the employer to an RPP
• The contribution is an eligible contribution (as defined in subsection 147.2(2) of the Act)
• The contribution is made to fund benefits for the employer's employees in respect of periods before the end of the Taxation Year
• The contribution complies with the PSPA certification requirements in subsection 147(10) of the Act.
• The contribution is made in the Taxation Year or within 120 days of the end of the Taxation Year.

Based on the facts in the hypothetical situation, it is our view that provided the requirements of subsection 147.2(1) of the Act are met, the employer is permitted a deduction in Year 1 for an eligible contribution for past service made in the first 120 days of Year 2.

We trust that these comments will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch