19 December 1996 Internal T.I. 9633137 - XXXXXXXXXX DOWNSIZING PROGRAM

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:

Whether amounts paid on downsizing to enhance pension benefits are taxable to employees.

Position:

No

Reasons:

The amounts are obtained by reducing the employee's entitlement to severance pay through negotiation; no taxation to employee until received out of the pension plan.

			December 19, 1996

	XXXXXXXXXX TAX SERVICES OFFICE	HEADQUARTERS
	XXXXXXXXXX	P. Spice
	Director	(613) 957-8953

	Attention:  XXXXXXXXXX
			963313

XXXXXXXXXX

This is in reply to your facsimile transmission of October 3, 1996, enclosing information concerning the benefits to be received by employees who accept voluntary termination under the above-noted program (the "Program"). You ask whether the employees are required to report as income amounts used to purchase additional years of pension credits under an approved downsizing program as described in section 8505 of the Income Tax Regulations (the "Regulations"). The relevant facts and our analysis of the tax consequences follow.

FACTS:

XXXXXXXXXX

ANALYSIS: The following are some of the different ways contributions to a registered pension plan under an approved downsizing program can be made without any immediate tax consequences to the employee. References are made to the "employment contract" (pre-existing rights) and the "program" (rights created under a downsizing exercise). Note that the "program" is actually part of the employment contract and basically constitutes an amendment/addition to the employment contract.

1. Method:

The employee has a right to a retiring allowance under the employment contract which will become payable, for example, on the date the employee reaches retirement age or tenders his resignation or offer to terminate; and before that date the employment contract provides, or is amended to provide, or the program is created which grants, the employee an option to forego all or part of the retiring allowance to fund the pension benefits; and the employee exercises the option before the applicable date. (An analogous situation with respect to employee benefit plans is discussed in paragraph 11 of IT-502.)

Tax consequences:

Subparagraph 6(1)(a)(i) of the Act will exempt from immediate taxation an employee choosing the section 8505 pension benefits. The employer is entitled to a deduction to the extent permitted by subsection 147.2(1) and paragraph 20(1)(q) of the Act. Note that the employment contract or program may provide that one or the other of the benefits will be paid or enjoyed where the employee fails to elect. In these circumstances, of course, the tax consequences will flow from the effect of the default provision.

2. Method:

The employee has

(a)a right to either a retiring allowance or enhanced pension benefits under the employment contract, or

(b)no right under the employment contract to either but the program grants the employee an option to choose one of the two types of benefits,

Tax consequences:

As discussed under 1 above.

3. Method:

The employee receives the full amount of the retiring allowance due under the employment contract and the employer agrees under the program to offer additional pension benefits.

Tax consequences:

As discussed under 1 above.

OPINION: In our view the method of choosing enhanced pension credits under the Program is similar to that described in 1 above. The employees are taxable, therefore, on the amount of pension benefits when received pursuant to subparagraph 56(1)(a)(i) of the Act.

Note that benefits received under a section 8505 downsizing plan do not give rise to a pension credit or provisional past service pension adjustment because of the exemption under subsection 8308(9) of the Regulations.

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

c.c.Kevin Smith

Registered Plans Division