2012-0457981E5 Restorative payment to registered plan

Principal Issues: Whether a restorative payment made by an employer to restore value to an employee’s registered plan is a taxable benefit to the employee?

Position: Question of Fact. General comments provided.

Reasons: Where a payment made by an employer into a registered plan of an annuitant is reasonable compensation for an employee’s financial loss and the payment is the result of a wrongdoing or tort in the administration of the plan, it is generally the CRA’s position that the amount will not generally be considered employment income to the employee, a premium to the RRSP or a contribution to the pension plan.

Author: Hooey, Kathy
Section: 5(1); 6(1)(a); 60(i); 146(1); 146(5)

XXXXXXXXXX
                                                                                                                                         2012-045798

November 18, 2014

Dear XXXXXXXXXX,

Re: Restorative Payment by Employer to Group RRSP

This is in response to your request for a written interpretation regarding whether a restorative payment made by XXXXXXXXXX (the “Employer”) to a group registered retirement savings plan or a company defined contribution pension plan (the “Plans”) in respect of an employee, will be considered a taxable benefit to the employee.

You have indicated that employee contributions, made by payroll deduction and deposited to the accounts of employees under the Plans are matched by the Employer up to a maximum of XXXXXXXXXX% of earnings. You further indicated that the Employer accidentally missed contributing the Employer’s portion on behalf of an employee for a XXXXXXXXXX time period. It is the Employer’s intention to make a restorative payment to the accounts of the employee under the Plans to compensate the employee’s accounts for the loss of income that has resulted from the Employer missing the contribution.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Our comments:

Where a payment made by an employer into a registered plan of an annuitant is reasonable compensation for an employee’s financial loss and the payment is the result of a wrongdoing or tort in the administration of the plan, it is generally the Canada Revenue Agency’s position that the payment would not be viewed as employment income to the employee. In these circumstances, neither the employer nor the employee are considered to have made a contribution or paid a premium to the registered plan as a consequence of the payment of damages and therefore, there is no corresponding deduction available under paragraph 20(1)(q) or paragraph 60(i). It will ultimately be a question of fact as to whether, in the particular circumstances, the Employer is negligent of a wrongdoing or tort in the administration of the Plans. 

In regards to an employer payment made in respect of missed contributions to an employee’s registered plan, an employee would generally be liable for Part X.1 tax under subsection 204.1 of the Act where the contributions cause the employee to have a cumulative excess amount in respect of the employee’s RRSPs.

For more information, please refer to Income Tax - Technical News No. 39 Settlement of a Shareholder Class Action Suit - Compensation by Way of Cash and Shares, and ATR-24 RRSP Damages Suit Against Investment Management Companies.

We trust these comments will be of assistance to you.

Yours truly,

Lita Krantz CPA, CA
for Director,
Deferred Income Plans, Section II
Financial Industries and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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