17 September 1996 Internal T.I. 9625307 - DISABILITY BENEFITS OUT OF RPP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1) Whether disability payments out of an RPP are employment income or pension benefits;
2) whether eligible as "pension income" for pension tax credit;

3) whether repayment of same is deductible.

Position:

1) Pension benefits;
2) may be "pension income" if "in respect of a life annuity";

3) no deduction.

Reasons:

1) Wording of 56(1)(a)(i);
2) not sure if these benefits are "in respect of life annuity" - not enough info;

3) the only specific deduction (60(n)) is not applicable.

                                                September 17, 1996

      WINNIPEG TAX SERVICES OFFICE        HEADQUARTERS
      Bruce Cook                          P. Spice
      Director                                  (613) 957-8953
      Attention:  Nori Rubert
                  Payroll Audit
                                                962530

Disability Benefits from Pension Plan: Employment Income or Pension Benefit

This is in reply to your memorandum of July 22, 1996, in which you ask whether disability benefits from a registered pension plan ("RPP") should be reported as pension income on a T4P slip or as "other income" in respect of wage-loss replacement plan benefits on a T4A slip.

We confirm that any amount received out of or under a registered pension plan is a pension benefit taxable in accordance with subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act").

You also ask whether a recipient of such a taxable pension benefit is eligible for the pension tax credit in accordance with subsection 118(3) of the Act. The definition in subsection 118(7) of the Act of both "pension income" and "qualified pension income" includes "a payment in respect of a life annuity out of or under a superannuation or pension plan".

We do not have sufficient information concerning the plan to determine if the payments are "in respect of a life annuity". Generally, a "life annuity" is a contract issued by a life insurance company which provides periodic payments for life with or without a guaranteed term. If the disability benefits form part of early retirement benefits provided because of the member's disability, they may indeed be "in respect of a life annuity". If, however, the payments are income to replace salary or wages and the member continues to accrue retirement benefits which will fund a pension commencing at retirement age under the plan, they may not be payments "in respect of a life annuity". You should review the RPP plan text and, if necessary, request further information from the RPP administrator to determine if these payments are funded or otherwise contingent upon "life annuities".

Lastly, the comments we provided in our memorandum of February 27, 1995 (942790), concerning the repayment of the disability benefits are still relevant. Although paragraph 60(n) of the Act permits a deduction for the repayment of certain pension overpayments, there is no deduction for repayments of this type of subparagraph 56(1)(a)(i) income. Other deductions in sections 60 and 147.2 of the Act respecting payments to an RPP are inapplicable. Remission of tax is one avenue open to the taxpayer should you wish to consider it on a case-by-case basis.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch