21 July 1998 External T.I. 9814305 - RETIRING ALLOWANCES, RELATED EMPLOYERS

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. Are two municipal employers related for the purpose of determining the total years of service under paragraph 60(j.1)?

2. Can retiring allowances be transferred to a spousal RRSP?

3. Can current service RPP contributions that were previously not deductible be carried forward and deducted?

Position:

1. This is a question of fact but most municipal employees in Ontario are covered by the same pension so all years with each employer can generally be counted.. It is not material where sick leave entitlement arose as long as it is being paid by current employer.

2. No.

3. Pre 1990 service contributions may be carried forward.

Reasons:

Application of the law in each case.

XXXXXXXXXX 		981430, 981431
			. C. Harding
July 21, 1998

Dear XXXXXXXXXX:

Re: Accumulated sick Leave Payout on Retirement
Transfer to an RRSP

This is in reply to your two letters dated May 8, 1998, wherein you asked whether a payment in respect of accumulated sick leave credits that you expect to receive next year when you retire could be transferred to a spousal registered retirement savings plan (“RRSP”) and, in determining the amount of the retiring allowance that could be transferred to an RRSP, whether you can include the years of service with a previous employer that also participated in the Ontario Municipal Employees' Retirement System ("OMERS"), your current employer’s pension plan.

Written confirmation of the tax implications inherent in particular proposed transactions are given by this directorate only where the transactions are outlined in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Although we cannot provide specific answers to your query, we can provide the following general comments which may be of assistance to you.

The enclosed Interpretation Bulletin IT-337R3 titled “Retiring Allowances” describes what is meant by a retiring allowance, the taxation thereof and the circumstances under which a retiring allowance may be transferred without immediate tax consequences (other than the possible application of minimum tax) to an RRSP. We note that paragraph 5 of IT-337R3 states that a payment of unused sick leave credits qualifies as a retiring allowance and paragraph 12 states that all or part of a retiring allowance may be transferred to an RRSP under which the taxpayer is the annuitant. Consequently, while a taxpayer is able to claim a tax deduction under 60(j.1) of the Income Tax Act (the “:Act”) in respect of unused sick leave credits that are contributed to an RRSP, this rollover is not applicable to a spousal RRSP.

Paragraph 60(j.1) of the Act provides a deduction for the transfer of a retiring allowance to an individual's RRSP or registered pension plan with the deduction limited to the maximum amount described in subparagraph 60(j.1)(ii) of the Act. That is, $2000 times the number of years before 1996 during which the individual was employed by the employer or a "person related to the employer" plus $1500 times the number of years before 1989 in respect of which employer contributions under a pension plan or deferred profit sharing plan of the employer or a "person related to the employer" had not vested in the individual at the time the retiring allowance was paid.

It is a question of fact whether a person is "related to an employer” as required by subparagraph 60(j.1)(ii) of the Act and there are, various provisions in the Act, such as section 251 and subparagraphs 60(j.1)(iv) and (v) of the Act, which define certain relationships as satisfying this test. The Department’s general views in respect of a person related to the employer for purposes of paragraph 60(j.1) of the Act can be found in subparagraph 13(b) of IT-337R3. Subparagraph 60(j.1)(v) of the Act, provides that a related employer includes a former employer of a retiree if any part of the retiree’s service with the former employer is recognized in determining the individual's pension benefits receivable upon retirement from the current employer. In other words, if an employee’s years of service with a previous employer are used in determining the employee’s pension from the current employer, then the employee’s years of employment with the former employer may be added to the employees current years of service to arrive at the total years of employment for purposes of subparagraph 60(j.1)(ii) of the Act. It should be noted, however, that a calendar year may only be counted once if the employee worked for both employers in the same year and that a year of service can not be counted a second time if it was previously used to compute a transfer a retiring allowance to an RRSP under paragraph 60(j.1) of the Act.

An employee’s current employer should know what service is being funded under an employee’s pension plan so that under normal circumstances it should not be necessary for an employee to provide documentary evidence. It is also generally acceptable for a current employer to pay a retiring allowance based on a cash payout of sick leave accumulated with a previous employer where the credit was rolled over to the current employer.

With respect to pre-1990 current service contributions that were made to a registered pension plan by an employee and were not deducted by the employee for a preceding year, the employee may claim a deduction for a year under paragraph 147.2(4)(c) of the Act equal to the lesser of:

(a) the amount of the contributions made by the employee in the year or a preceding year (after 1962) for eligible service under a registered pension plan in respect of a year before 1990, minus deductions previously claimed for those deductions; and

(b) $3,500 minus the total of amounts deducted for the year for current service and post-1989 past service contributions and pre-1990 past service contributions while not a contributor.

Consequently, where a person retires and that person has unclaimed pre-1990 current service registered pension plan contributions, the person may be entitled to claim up to $3,500 per year under paragraph 147.2(4)(c) of the Act. In this regard, we would refer you to paragraph 7 of the enclosed Interpretation Bulletin IT-167R6 titled “Registered Pension Plans - Employee Contributions”.

We trust these comments will be of assistance to you.

Yours truly,

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

Enclosures