11 October 2006 Internal T.I. 2006-0204641I7 - Qualifying Retroactive Lump Sum Payment

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: Will the payment of prior years pension benefits by an RPP to a plan beneficiary after the death of the annuitant, qualify as a "qualifying retroactive lump sum payment" for purposes of section 110.2 of the Act in the following two scenarios: 1) A plan member's spouse receives a lump sum in respect of missed periodic pension payments of prior years that were due to the member before his or her death? 2) Where the RPP provides the continuation of benefits to a spouse after the death of the member, this member's spouse receives a lump sum in respect of these missed continuation benefit payments?

Position: 1) No 2) Question of fact, but likely yes

Reasons: 1) As the member's spouse was not entitled to receive the benefits from the RPP in the year to which benefits relate, the conditions of 110.2 have not been met. 2) As the spouse had entitlement to receive the pension benefits as the continuation of benefits were due to the spouse in the prior year, the provisions of 110.2 may be applicable, provided the other conditions of the provision have been satisfied

							October 11, 2006

HEADQUARTERS					HEADQUARTERS
Registered Plans Directorate			Income Tax Rulings
		  					Directorate
 	Attention:  Don McGuire			Kimberly Duval, CA
(613) 599-6054
							2006-020464

Qualifying Retroactive Lump Sum Payment - Section 110.2

This is in response to your e-mail correspondence of September 11, 2006, requesting our comments as to whether the lump sum payment of prior years pension benefits by a registered pension plan ("RPP") to a beneficiary of the plan after the death of the member would qualify as a "specified portion" of a "qualified amount" for purposes of section 110.2 of the Income Tax Act (the "Act"). You have provided us with the following two different scenarios:

Scenario 1:

• A member of an RPP is entitled to receive a lump sum payment from the RPP in respect of missed periodic pension payments that were due to the member of the plan.
• The member dies before the payment is made, such that the lump sum payment in respect of the missed periodic pension payments is paid in a later year (after 1994) to the deceased member's spouse as the plan beneficiary.
• The lump sum payment exceeds $3,000 and does not represent a payment of interest or pension surplus.

Scenario 2:

• A plan member's spouse is entitled to receive periodic pension payments as a continuation of benefit payments after the death of the plan member. The spouse receives a lump sum payment from the RPP in respect of these missed periodic pension payments.
• The lump sum payment, which is made in a subsequent taxation year (after 1994), exceeds $3,000 and does not represent a payment of interest or pension surplus.

Your e-mail to us further explains that, in certain circumstances, a spouse, as a plan beneficiary, may receive two separate lump sum amounts from the RPP after the death of the member, one representing prior years benefits originally owed to the member of the RPP before his or her death, as described in Scenario 1, and the other lump sum amount representing prior years continuation of benefits owed to the spouse as the plan beneficiary, similar to Scenario 2. Alternatively, the spouse may receive one lump sum amount from the RPP representing both types of prior years benefits.

In your view, the retroactive averaging of taxes payable on qualifying amounts provided under subsection 110.2(2) of the Act would only be applicable in Scenario 2. As such, one lump sum payment from the RPP to a beneficiary that represented a combination of both types of benefits from a prior year, i.e. both scenarios described above, would be problematic.

Our Comments

We agree with your views that the provisions of section 110.2 of the Act would only apply in Scenario 2. Specifically, section 110.2 of the Act allows an individual to deduct in computing taxable income for a taxation year, the "specified portion", in relation to an "eligible year", of a "qualifying amount" received by the individual in that year, if the total is $3,000 or more.

The term "specified portion" is defined in subsection 110.2(2) of the Act to quantify the portion of the qualifying amount that relates to a prior year that may then be deducted from income in the current year. This term is specifically defined to mean the portion of the qualifying amount that relates to the prior year "to the extent that the individual's eligibility to receive the portion existed in the year".

Therefore, a lump sum amount received by a recipient beneficiary from an RPP where he or she was not entitled to the benefit in the prior year, as described in Scenario 1, will not be eligible for the provisions under subsection 110.2(2) of the Act. Alternatively, where an individual beneficiary receives a lump sum amount to which a right to the benefit existed in the prior year, as described in Scenario 2, the provisions of section 110.2 would be applicable. In circumstances where the spouse receives one lump sum amount from the RPP representing both types of payments, we would agree that it would be preferable for the RPP administrator to segregate the amounts, as the tax treatment for the payments is different. However, we cannot comment as to whether two cheques would need to be issued, that would have to be determined on an administrative basis.

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