12 December 1989 Income Tax Severed Letter ACC8966 F - SOS Questions and Answers - January Issue

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.

Attention:  A. Ouellette

SUBJECT:  SOS QUESTIONS AND ANSWERS - JANUARY ISSUE

This is in reply to the Round Trip Memorandum of October 31, 1989.

We have reviewed the above-noted material on the basis of the provisions of the Income Tax Act and Regulations as proposed to be amended by Bill C-28 (first reading, June 20, 1989), the draft Notice of Ways and Means Motion dated 13-9-89 dealing with pension reform, the document "Draft Income Tax Regulations, Legislation and Explanatory Notes" released by the Department of Finance on December 16, 1987, the Department of Finance releases 89-079 dated August 4, 1989 ("Draft Legislation on Available-for-Use Rule Issued"), 89-083 dated August 14, 1989 ("Revised Limits Concerning Capital Cost Allowance..."), 89-006 dated January 24, 1989 ("Draft Regulations and Legislation Concerning Capital Cost Allowance in Respect of Motor and Passenger Vehicles").

Our comments are set out below.

SOS #1

1.     Answer.  First paragraph.  The second sentence should be qualified so that it does not apply to situations where the deposit of funds results in the creation of a trust. A trust is not required to provide a SIN because of the exception in subsection 237(1).

21(1)(b)

SOS #2

2. (a)     Answer.  First paragraph.  The reference to paragraph 13(a) of the Canada Pension Plan should be to paragraph 14(a).  (The "Reference" should refer to CPP 13(1), not CPP 13(a), and to CPP 14(a).)

2. (b)     Note.  The comments concerning "earned income" for RRSP purposes would be incorrect to the extent that no exception is being made for the limited partner's share of limited partnership income consisting of "property" (as opposed to "business") income from the rental of real property.  See clause 146(1)(c)(i)(C).  Also, the present reference to subparagraph 146(1)(c)(ii) should instead be to clause 146(1)(c)(i)(B).

SOS #3

3.     Question.  Both the meaning and source (payer) of the "payout of $20,500 for six months sick time" become clear only upon reading the answer.  In our view, they should be clear in the question.  In addition, we believe that a question involving a 1989 (rather than 1988) taxation year would be more informative.  Finally, there should be an indication that the qualifying situation referred to in subparagraph 118(3)(b)(ii) is not applicable.

4.     Answer.  There are a number of deficiencies:

(a)     The second paragraph does not properly reflect the provisions in clauses 60(j.1)(ii)(A) and (B).  The $2,000 applies to employment years with the employer paying the retiring allowance as well as with persons related to that employer.  The $1,500 is multiplied by the number of the mentioned employment years before 1989 in excess of the equivalent number of years before 1989 in respect of which employer contributions to a pension plan (not necessarily a registered pension plan) or a DPSP vested in the taxpayer.  In summary, the existing paragraph neglects to incorporate the "equivalent number of years" concept, unnecessarily restricts contributions to registered pension plans, and neglects to refer to contributions to a DPSP.

(b)     The third and fourth paragraphs incorrectly suggest that disentitlement to the pension credit arises if there is a paragraph 60(j) transfer of pension income.  In fact, disentitlement would arise if paragraph 60(j) transfer is made, except a subsection 147(10) payment in settlement of all rights under a DPSP.

     See Exhibit A for our suggested rewording of the question and answer.

SOS #4

5.     Question.  The last sentence could be rewritten as two separate questions.  The first would deal with timing restrictions for making RRSP contributions; the second, with the actions to be taken at maturity of a RRSP.

6.     Answer.  The comments incorrectly suggest that all RRSPs mature at the end of the year in which the annuitant attains 71 years of age.  In our view, the answer should address both when the maturity date may occur and when contributions may be made.

     See Exhibit 8 for our suggested rewording.

SOS #5

7.     Situation.  It is unclear as to which type of exempt allowance in paragraph 6(1)(b) reference is being made.  Could the statutory reference not be more specific (ie., subparagraph 6(1)(b)(vii.1))?  The description of the "situation" is unclear with respect to both the facts and the tax treatment of allowances.

     The reference to section 8 is also ambiguous since most taxpayers would claim a deduction under section 8.  We suggest that the statutory reference be to paragraph 8(1)(h) or (f), or both.

If you have any questions, please call us.

Bernhard BuetowActing Director Technical Interpretations DivisionLegislative and Intergovernmental Affairs Branch

EXHIBIT A

Question:

Upon retirement in February 1989, a 55 year old taxpayer received from his employer a lump sum payment of $20,500 in respect of unused sick leave credits.  The taxpayer also received pension income in 1989.  The taxpayer did not receive a disability or survivor's pension under the Canada Pension Plan or under provincial pension plan.

(a)     What is the nature of the lump sum payment?

(b)      Can it be transferred to an RRSP?

(c)     If it is transferred to an RRSP, will the taxpayer's entitlement to the pension credit (non-refundable tax credit) be affected?

Answer:

(a)     The $20,500 payment would qualify as a retiring allowance.  A retiring allowance is an amount (excluding a superannuation or pension benefit or an amount received as a consequence of an employee's death) either received upon or after retirement from an office or employment in recognition of long service or received in respect of loss of an office or employment; it includes a payment in respect of unused sick leave credits.

(b)     As the payment constitutes a retiring allowance, it can be transferred to an RRSP pursuant to paragraph 60(j.1).  The amount transferred on a tax free basis cannot exceed $2,000 times the number of years of employment with either the employer paying the retiring allowance or a related person, plus $1,500 times the equivalent number of years before 1989 in respect of which no employer contributions to a pension plan or a DPSP of the employer or related employer vested in the taxpayer.

(c)     The transfer of a retiring allowance to an RRSP under paragraph 60(j.1) does not disentitle the taxpayer from the pension credit.  However, if the taxpayer effects any transfer (except a subsection 147(10) payment in satisfaction of all rights under a DPSP) under paragraph 60(j) (for example, pension income transferred to a RPP or RRSP), he is unable to claim the pension credit.

EXHIBIT B

Question:

A taxpayer wishes to contribute to a spousal registered retirement savings plan (RRSP) in 1990.  His spouse will turn 71 years of age in April of 1990.

(a)     Can the taxpayer make the contribution?

(b)     Does the spousal RRSP have to be converted either into a RRIF or annuity or cashed out by the end of April 1990?

Answer:

(a)     While contributions may be made at any time on or before maturity of an RRSP, maturity cannot be later than the end of the year in which the annuitant attains 71 years of age.  In the instant situation, the taxpayer may contribute to a particular spousal RRSP at any time in the period January 1 - December 31, 1990, provided the maturity date of that particular RRSP is December 31, 1990.

(b)     An RRSP must be converted on maturity into an annuity or cashed out, or the funds transferred to an RRSP, RRIF, or RPP under subsection 146(16).  As indicated in (a) above, since the latest maturity date of the spousal RRSP could be December 31, 1990, that is the latest date when the spousal RRSP would have to be converted into an annuity or cashed out, or the funds transferred to an RRSP, RRIF, or RPP under subsection 146(16).