18 November 1998 External T.I. 9827345 - RETIRING ALLOWANCE VESTED 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.

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. Will an employer be related to a former employer of a retiree by virtue of 60(j.1)(v) where years of service with the former employer are used to eliminate an early retirement penalty under the employer's pension plan?

2. Assuming the answer to 1 is Yes, where no portion of the years of employment with the former employer are used to determine pensionable service (because the employee did not buy back the service), can they be counted under the provisions of 60(j.1)(ii)(B).

Position:

1. Yes
2. Yes

Reasons:

1. Pension plans generally provide for a reduction in a pension that is otherwise payable, for each year a retiree's years of service falls short of some criteria. (In the present case a penalty will apply if an employee retires before the employee's total years of service plus age = 85) If an employer's plan allows an employee to count years of service with a former employer in order to reduce this penalty, we take the position that the years of service with the former employer are being recognized in computing the retiree's pension benefits. Accordingly the former employer will be considered to be a person related to the employer in accordance with paragraph 60(j.1)(v) of the Act.

2. It is our position that if neither the former employer or current employer contribute any amounts into the plan in respect of the years of service with the former employer then no amounts will be vested in respect of those years. In this case, it is our opinion that the years only count in determining a reduction of the pension that is determined on the basis of the years of service with the current employer. They do not increase the number of years for which the employer must provide additional funding.

XXXXXXXXXX 		982734
W. C. Harding
November 18, 1998

Dear Sir:

Re: Transfers of Retiring Allowance to an RRSP

This is in reply to your facsimile of October 22, 1998, regarding the above noted topic.

Since your letter deals with a factual situation, we are unable to address your specific concerns in a general letter of opinion. Proposed transactions may only be considered when they are presented in the form of a request for an advance income tax ruling and only where the request is made in the manner set out in the Department's Information Circular 70-6R3. Nevertheless we can provide the following general comments which may be of assistance.

Subparagraph 60(j.1)(ii) of the Income Tax Act (the "Act") provides that the amount of a retiring allowance eligible for a deduction upon transfer to a registered retirement savings plan is calculated by reference to the number of years of employment with the current employer and with "a person related to the employer". For this purpose, paragraph 60(j.1)(v) of the Act provides that a previous employer of a retiree will be treated as a related employer if service with the previous employer is recognized in determining the retiree's pension benefits

Pension plans generally provide for a reduction in a pension that is otherwise payable, for each year a retiree's years of service fall short of some criteria. If an employer's plan allows an employee to count years of service with a former employer in order to reduce this penalty, we take the position that the years of service with the former employer are being recognized in computing the retiree's pension benefits. Accordingly the former employer will be considered to be a person related to the employer in accordance with paragraph 60(j.1)(v) of the Act.

In calculating the limits on the deduction under paragraph 60(j.1) of the Act, paragraph 60(j.1)(ii) also provides that the amount deductible can not exceed the total of

(A) $2,000 multiplied by the number of years before 1996 during which the retiree was employed by the employer or a related employer; and

(B) $1,500 multiplied by the number by which the number of years before 1989 described in (A) exceed the equivalent number of years before 1989 in respect of which employer contributions under a pension or deferred profit sharing plan of the employer or a person related to the employer had vested in the retiree at the time of payment of the retiring allowance.

In our opinion the number under (A) will include years of service with a person related to the employer in the manner discussed above. However, in our opinion none of these years should be included in the calculation of the "equivalent number of years" under (B) where contributions of the previous employer were not vested in the retiree and the years did not form part of the pensionable service with respect to the current employer's pension.

To clarify, assume a retiree with 27 years of pensionable service with an employer is entitled to a pension of 2% multiplied by the 27 years pensionable service less a penalty for each year of service below 30. Also assume the retiree previously worked for 3 years with another employer but had no vested contributions under the previous employer's pension and that under the terms of the current pension this service can not be counted as pensionable service but can be applied to eliminate the early retirement penalty.

In our opinion the employee could treat the prior employer as a person related to the current employer, count the 30 years of service under (A) above and the 3 years of service with the prior employer under (B) above (this being 30 years minus the 27 years for which benefits have vested).

The above comments are based on our understanding of the law as it applies in general and may or may not apply to the circumstances of a particular case. They do not form an advance income tax ruling and they are not binding on the Department.

Yours truly,

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