19 March 2014 External T.I. 2014-0522681E5 - RA and Vesting of Employer 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: Employee had transferred a lump sum from his previous employer's pension plan to a RRSP. Whether employer contributions have vested for the purposes of clause 60(j.1)(ii)(B)?

Position: Yes.

Reasons: Contributions have vested because the transferred lump sum included the employer's contributions.

XXXXXXXXXX
2014-052268
P. Tsang

March 19, 2014

Dear XXXXXXXXXX:

Re: Retiring Allowance and Vesting of Pension Benefits

This letter is in reply to your correspondence of March 3, 2014 regarding the eligible amount of a retiring allowance for transfer to a registered retirement savings plan ("RRSP") in accordance with paragraph 60(j.1) of the Income Tax Act (the "Act").

Your situation is summarized as follows. In XXXXXXXXXX, XXXXXXXXXX ("Employer A") purchased a business from XXXXXXXXXX ("Employer B") and employees from Employer B continued their employment with Employer A. While an employee worked for Employer B, he participated in a pension plan to which Employer B made contributions. When the employee stopped working for Employer B in XXXXXXXXXX, a lump sum amount was transferred from the pension plan to the employee's RRSP, which included Employer B's contributions. Both employers recognize the employee's employment start date to be XXXXXXXXXX. You ask whether the employee is entitled to an eligible amount of a retiring allowance to be transferred to a RRSP.

This technical interpretation provides comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in information circular (IC)70-6R5, "Advance Income Tax Rulings".

Subject to certain limitations, paragraph 60(j.1) of the Act allows a taxpayer to deduct an amount in computing the taxpayer's income for a year where all or a portion of a retiring allowance received in the year by the taxpayer is contributed to the taxpayer's RRSP. Among other limitations, subparagraph 60(j.1)(ii) of the Act limits the amount that may be deducted under the paragraph to the total of:

a) $2,000 multiplied by the number of years before 1996 during which an employee for whom the payment was made was employed by the employer or a person related to the employer; and

b) $1,500 multiplied by:

(i) the number of years before 1989 during which the employee 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 of the employer or a person related to the employer had vested in the employee at the time the retiring allowance was paid.

Subparagraph 60(j.1)(iv) provides that for the purposes of paragraph 60(j.1) "person related to the employer" includes any person whose business was acquired or continued by the employer. Therefore, Employer A and Employer B would be considered related for the purpose of the calculation in part a) above.

As for part b) above, it is our view that contributions to a plan have vested in an employee when the retiring allowance is paid if the employee at the time the retiring allowance is paid is entitled to either a pension or a lump sum amount from the plan, which includes the employer's contributions. In your situation, the employee who participated in Employer B's pension plan had a lump sum transferred from the pension plan to his RRSP, which included Employer B's contributions. In our view, the employer contributions would be considered to have vested in the employee. Therefore, an additional amount pursuant to the calculation in b) above would not be available.

We trust that our comments will be of assistance to you.

Yours truly,

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