11 September 1989 Income Tax Severed Letter 7-4309 - Election to buy back prior years service for pension purposes and agreement to pay the cost of the buyback through installments which included an interest element

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.

Enclosed please find the 1986, 87 and 88 T1 returns for the above-noted taxpayer which we are returning to you for processing.

The taxpayer elected to buy back prior years service for pension purposes and agreed to pay the cost of the buyback through installments which included an interest element. Until recently the Department's position has been that this installment interest element was not deductible in calculating income either as an interest expense or as a pension contribution. Our position however, has been changed as a result of a recent judicial decision. This interest will now be considered a pension contribution deductible in accordance with the provisions of paragraphs 8(1)(m) and 60(j) of the Income Tax Act (the "Act").

XXX filed a notice of objection for the taxation years "1986 and onward" and has applied to the courts for an extension of time in or to have his objection considered. Should the courts determine that XXX objections may be considered we ask that you allow reassessments for each of the years 1986 and 1987 on the basis of our new position. We also ask that you follow this position in assessing XXX 1988 and subsequent years, subject, however, to the proposed amendments to the Act under pension reform.

Based on the Information available, and in line with our current position, XXX would be entitled to an 8(1)(m)(ii) deduction in each of the years 1976 to 1984 inclusive for the full amount of past service contributions (including installment interest) paid in those years. To the extent that some of these amounts were disallowed in accordance with our previous position, the amounts should be accumulated and carried forward pursuant to 8(8)(c).

In 1985, XXX apparently made past service contributions of XXX. Of this, he was probably allowed an 8(1)(m)(ii) deduction of $3,500 and may also have been allowed a paragraph 60(j) deduction equal to the lesser of his pension income, if any, and the balance of the amount paid. Any amount not deductible under either 8(1)(m)(ii) or 60(j) in 1985 should be accumulated with the carry forward balance under 8(8)(c) noted in the preceding paragraph.

Assuming that the extension of time for the notices of objection is granted, each of XXX 1986 to 1989 returns should be reassessed (or assessed as the case may be) to allow the following:

XXX

In finalizing your reassessments, XXX should be made aware of the following:

• 1. the transfer of periodic pension payments to a pension plan will no longer be deductible under the provisions of proposed paragraph 60(j) after 1989,
• 2. it is unlikely that he will be entitled to a 147.2(4)(b) deduction (the pension reform equivalent to 8(1)(m)(ii) and 8(8)(c)) in future years with respect to his past service contributions made after 1989 given the limit XXX minus previous 8(1)(m)(ii) deductions, and
• 3. he will in each year be entitled to a 147.2(4)(c) deduction (the equivalent to 8(1)(m)(iii) and 8(8)(d)) in respect of his excess current service contribution carry forward equal to the lesser of $3,500 and the aggregate of the excess contributions less amounts previously deducted under 8(1)(m)(iii) or 147.2(4)(c).

Should you wish to discuss any matters relating to the above please feel free to call Wayne Harding of this office at the number noted above.