30 October 2012 External T.I. 2012-0460531E5 - Deductibility of IPP 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: Whether an employer IPP contribution made in Year 2, in respect of Year 1, is deductible in Year 2.

Position: Yes.

Reasons: An IPP contribution made in a taxation year in respect of periods before the end of that year is deductible, providing all of the other criteria in section 147.2 is met.

XXXXXXXXXX
2012-046053
Kathy Hooey
905-721-5095
October 30, 2012

Re: Deductibility of Pension Contributions

This is in response to your request for guidance dated August 28, 2012 regarding the deductibility of an individual pension plan contribution (the “Contribution”) made by a corporate employer in respect of the defined benefit provision of a registered pension plan (“RPP”) under section 147.2 of the Income Tax Act (the “Act”). In particular, you question whether the Contribution made to fund benefits provided to employees in respect of periods before the employer’s taxation year ended March 31, 2012 (“Year 1”) is deductible pursuant to section 147.2 of the Act in the taxation year ended March 31, 2013 (“Year 2”), the year the Contribution was made.

The particular situation outlined in your correspondence appears to relate to a factual one, involving one or more specific taxpayers. It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on the internet at http://www.cra arc.gc.ca. We are, however, prepared to provide the following general comments which may be of assistance.

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 a contribution as an expense from business income in a particular year (the "Taxation Year"). Generally, these requirements are:

• The contribution is made by the employer to a 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 past service pension adjustment certification requirements in subsection 147.1(10) of the Act, and
• The contribution is made in the Taxation year or within 120 days of the end of the Taxation Year

You referenced Document 2008-0284471C6 which provides the CRA’s interpretation on the deductibility of employer contributions where the corporation’s year and the contribution period do not match. Document 2008-0284471C6 clarifies that a portion of an employer’s contribution (9/12) was not deductible by virtue of subparagraph 147.2(1)(b)(ii) in the 2008 taxation year since it funded benefits in respect of periods subsequent to the 2008 taxation year end. Furthermore, the same 9/12 portion of the contribution was not deductible in the employer’s 2009 taxation year since it was not a contribution made in that taxation year (or within 120 days after the end of that year) as specifically required under subsection 147.2(1).

The situation you have described is distinguishable from that provided in Document 2008-0284471C6. Based on the information you provided, the Contribution was made in Year 2 to fund benefits provided to the employer’s employee in respect of periods before the end of Year 2. Accordingly, the Contribution would meet the specific requirements of subparagraph 147.1(2)(b)(ii) of the Act and would be deductible in Year 2 where the remaining requirements of subsection 147.2 (2) have been met.

Subparagraph 147.2(2)(a)(ii) of the Act requires that actuarial liabilities and current service costs are determined in a manner that reasonably matches contributions with accruing benefits. As is noted in the Technical Notes to the Act, this condition is intended to ensure that the actuarial liability is based, in a reasonable way, on accrued benefits. Confirmation that a contribution to a registered pension plan will be an eligible contribution in accordance with subsection 147.2(2) of the Act and, therefore, deductible in accordance with subsection 147.2(1) of the Act, can be obtained from the Registered Plans Directorate of the CRA.

We trust these comments will be of assistance to you.

Yours truly,

Lita Krantz CA,
Deferred Income Plans, Section II
for Director,
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch