Eligible Pension Income
Numerical examples where an individual over 65 in receipt of a pension out of a registered pension plan also receives an annuity out of a RCA.
What is the meaning of "life annuity"? CRA responded:
RCA benefits that are payable on a periodic basis for the lifetime of the member of the RCA or jointly for the lifetimes of the member and his or her spouse or common-law partner will be considered in the form of a life annuity.
However, to qualify as eligible pension income, the RCA benefits must … be payable in substantially the same form as the RPP benefits (i.e. payable for life in equal periodic amounts subject to inflation or other adjustments permitted under the RPP).
Respecting "the eligibility of amounts received out of a supplementary employee retirement plan ("SERP") for pension income splitting", CRA stated:
A SERP is a plan or arrangement, either funded or unfunded, that provides supplementary benefits to the beneficiary. Where such a plan is funded, the arrangement would generally be considered an RCA. However, where the plan is unfunded, the arrangement is not considered to be an RCA. As noted above, the amended definition of eligible pension income in subsection 60.03(1) of the Act only includes, among other things, payments out of an RCA in the form of life annuity payments that are supplemental to a pension received out of a RPP. As a result, payments out of an unfunded SERP are not eligible for pension income splitting.
CRA stated that, where a Canadian-resident individual converts a traditional US Individual Retirement Account ("IRA") to a Roth IRA, the amount of the IRA will be included in the taxpayer's income. Because payments out of an IRA are not "eligible pension income" under s. 118(7), pension splitting under s. 60.03 is not available.
Jim Kahane, Uros Karadzic, Simon Létourneau-Laroche, "A Fresh Look at Retirement Compensation Arrangement: A Flexible Vehicle for Retirement Planning", Canadian Tax Journal (2013) 61:2, 479 – 502.
Overview (p. 488)
…Spouses will now be able to split RCA distributions to the extent that the beneficiary of the income is at least 65 years of age and benefits received are in the form of a life annuity supplemental to an RPP. [fn 40: Subsection 60.03(1)..."eligible pension income," subparagraph (b)(i).] The amount that is eligible for splitting is limited to the lesser of the RCA income for the year and the amount, if any, of the beneficiary's other eligible pension income in excess of the defined benefit limit for the year ($2,696 for 2013) [fn 41: Regulation 8500(1).] multiplied by 35. . [fn 42: Subsection 60.03(1)…"eligible pension income," subparagraph (a)(ii).]
The 2011 budget introduced measures for individual pension plans (“IPPs”) that generally parallel the “minimum amount”-based income withdrawal rules for RRIFs, so that minimal withdrawals are required from an IPP if the plan member has attained 71.
CRA considers that any additional payment that an IPP is required to make in a year to comply with the IPP minimum amount rules is not eligible to be split with a spouse/common-law partner under the s. 60.03 income-splitting rules. The definition of “pension income” for such purposes references a “life annuity,” and such top-up payments would not qualify as being part of an annuity, i.e., a series of periodic payments.
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|Tax Topics - Income Tax Act - Section 118 - Subsection 118(7) - Pension Income - Paragraph (a) - Subparagraph (a)(i)||required top-up payments to satisfy the minimum-amount IPP rules do not qualify for income-splitting||260|
At the time of his death, Mr. X held a registered retirement income fund ("RRIF") with an FMV of $200,000. Under Mr. X's will, his son is a beneficiary of the RRIF. The liquidator of Mr. X's succession wishes to split the RRIF benefit with Ms. X. Is this permitted? CRA responded:
Under subsection 146.3(6), the last annuitant under a RRIF will be deemed, upon death, to have received, immediately before death, an amount out of or under a RRIF equal to the FMV of the property of the fund at the time of the death.
…[A]n amount deemed received by virtue of subsection 146.3(6) is not a payment under a RRIF for the purposes of the definition of "pension income" in subsection 118(7). Consequently, an amount deemed received by virtue of subsection 146.3(6) is not eligible for pension income splitting permitted by virtue of section 60.03.
CRA confirmed that a joint s. 60.03(1) election can be made by a pensioner (Mrs.) and a pension transferee (Mr.) in the situation where the pensioner become a bankrupt, say, on June 1, 2015 or, alternatively, the pension transferee became bankrupt on that date.
CRA noted that s. 128(2) does not exclude the joint s. 60.03 election, nor the inclusion or deduction under ss. 56(1)(a.2) and 60(c). Because the split-pension election relates to the 2015 taxation year, it is possible for pensioner and a pension transferee to jointly elect for each of her or his pre-bankruptcy and post-bankruptcy taxation years, providing the conditions stated in section 60.03 are met. The split-pension amounts deducted in the pensioner’s returns filed for her pre-bankruptcy and/or the post-bankruptcy taxation year(s) under s. 60(c) should be reported as income on the pension transferee’s return for calendar 2015 under s. 56(1)(a.2). If it is the pension transferee who became bankrupt, the split-pension amount deducted by the pensioner should be apportioned between the pre-bankruptcy and the post-bankruptcy taxation years of the pension transferee, based on the eligible pension income received in each such taxation year. In such a situation, the split-pension amount that relates to the post-bankruptcy taxation year of the pension transferee will generally be reported on the return filed by him as bankrupt under s. 128(2)(f).
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|Tax Topics - Income Tax Act - Section 128 - Subsection 128(2) - Paragraph 128(2)(f)||s. 60.03 deductions/inclusions still available||62|