6 July 1998 External T.I. 9808605 - RPP LUMP-SUM, ITAR 40(7)

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: Can a proration of pension benefits based on pre-72 service over total service be used to determine the amount eligible under 40(7) of the ITAR?

Position: No

Reasons: The provision is very clear and only the benefit that would have been received had the member left the plan at the end of 1971 is eligible.

XXXXXXXXXX 980860
M. P. Sarazin

Attention: XXXXXXXXXX

July 6, 1998

Dear Sirs:

Re: Subsection 40(7) of the Income Tax Application Rules (“ITAR”)

This is in reply to your letters dated March 31, April 14 and April 28, 1998, wherein you requested confirmation that a proportion, based on the period of pensionable service prior to 1972 divided by the total pensionable service, of a payment received out of a pension plan could be used for the purposes of determining the limit under subsection 40(7) of the ITAR. We note that you have been expecting a response from us since 1996 based on correspondence you received from another area of the Department. Unfortunately, no referral was made to us on this matter and, therefore, your letter was when this issue was first raised with us. Nonetheless, we apologize for the delay.

The purpose of subsection 40(7) of the ITAR was to extend the subsection 40(1) averaging provisions in respect of lump-sum withdrawals from a registered pension plan or a deferred profit sharing plan to a restricted amount received out of the particular plan after 1973. The amount eligible under subsection 40(7) of the ITAR is restricted to the lesser of the amount determined under subsection 40(1) of the ITAR and the amount that the employee would have received out of the plan had the employee withdrawn from the plan on January 1, 1972, subject to the conditions in paragraphs 40(7)(b) and (c) of the ITAR. Information Circular 74-21R provides the Department’s views in respect of lump sum payments out of a pension fund that may still be eligible for the subsection 40(1) of the ITAR averaging provisions.

In our view, the use of a formula based on pensionable service would not satisfy the conditions described in subsection 40(7) of the ITAR. In order to determine the amount that would qualify under subsection 40(7) of the ITAR, you will have to determine the amount that the employee would have received out of the plan had the employee withdrawn from the plan on January 1, 1972, subject to the conditions in paragraphs 40(7)(b) and (c) of the ITAR. We note that subsection 40(5) of the ITAR also places maximums on the payments that may qualify under subsection 40(1) of the ITAR.

We trust the above comments will be of assistance to you.

Yours truly,

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