2013-0515081I7 Pension income splitting - RCAs

Principal Issues: 1. What are the necessary conditions for payments received from a retirement compensation arrangement (“RCA”), established by Retirement Compensation Arrangements Regulations, No.1 pursuant to the Special Retirement Arrangements Act, to be eligible for pension income splitting under section 60.03 of the Income Tax Act (the “Act”)? 2. What is the amount eligible for pension income splitting for purposes of section 60.03 of the Act under the two scenarios provided?

Position: The amount of eligible payments out of or under the RCA is limited to the lessor of: o the total of all payments out of or under the RCA made in the year to the individual, and o an amount which is calculated as 35 times the ”defined benefit limit” for the year, as defined in subsection 8500(1) of the Income Tax Regulations, (for 2013: 35 x $2,696.67 = $94,383), less the individual’s other eligible pension income as determined under subsection 118(7).

Reasons: See below.

Author: Doiron, Wayne
Section: 60.03(1), 207.6(6), 6802.1(2) of the Regulations

                                                                                                                                                            2013-051508
                                                                                                                                                            W. Doiron

March 18, 2014

XXXXXXXXXX

Dear XXXXXXXXXX:

Re:   Pension income splitting – RCA payments

This is in response to your correspondence in which you have the following inquiries:

1.    What are the necessary conditions for payments received from a retirement compensation arrangement (“RCA”), established by Retirement Compensation Arrangements Regulations, No.1 pursuant to the Special Retirement Arrangements Act, to be eligible for pension income splitting under section 60.03 of the Income Tax Act (the “Act”)?
2.    What is the amount eligible for pension income splitting for purposes of section 60.03 of the Act under the two scenarios provided?

This technical interpretation provides general comments about the provisions of the Income Tax 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 70-6R5, Advance Income Tax Rulings.

General comments

A plan established by Retirement Compensation Arrangements Regulations, No.1 pursuant to the Special Retirement Arrangements Act is deemed to be an RCA under paragraph 207.6(6)(a) of the Act.  Consequently, any payments out of or under that plan would be considered payments out of or under an RCA for the purpose of determining “eligible pension income” under section 60.03 of the Act subject to the conditions outlined below.

Effective for the 2013 and subsequent taxation years, the Act is amended to include amounts received out of or under an RCA for the purposes of determining amounts eligible for pension income splitting under section 60.03 of the Act, subject to certain conditions as outlined in the
definition of “eligible pension income” under subsection 60.03(1) of the Act.  In general, the conditions that must be satisfied are the following:
1)    the individual must be age 65 or older before the end of the calendar year,
2)    the payments out of or under the RCA must be supplemental to pension benefits provided under a registered pension plan (“RPP”), other than an individual pension plan as defined in the Income Tax Regulations,
3)    the payments out of or under the RCA must be in respect of life annuity payments that are attributable to periods of employment for which benefits are also provided to the individual under the RPP, and
4)    the amount of eligible payments out of or under the RCA is limited to the lessor of:
a)    the total of all payments out of or under the RCA made in the year to the individual, and
b)    an amount which is calculated as 35 times the ”defined benefit limit” for the year, as defined in subsection 8500(1) of the Income Tax Regulations ($94,383 for 2013), less the individual’s other eligible pension income as determined under subsection 118(7) of the Act.
 

Scenario 1

The facts for this scenario are as follows:
*     The Plan member is 66 years old.
*     The Plan member receives $65,000 in pension income from an RPP.
*     The Plan member receives $40,000 in life annuity payments from an RCA.  The RCA provides benefits which supplement benefits provided under the above-noted RPP in respect of the same period of employment.

With respect to the amounts received by the Plan member from the RPP, the entire $65,000 of RPP payments received would be eligible for pension income splitting. With respect to the amounts received by the Plan member out of or under the RCA, all of the conditions in the definition of “eligible pension income” under subsection 60.03(1) of the Act would be met and the amount that would be eligible for pension income splitting would be calculated as the lessor of:
*     the amount determined under condition 4(a) above:  $40,000, and
*     the amount determined under condition 4(b) above:  $94,383 – $65,000 = $29,383.

In this scenario, a total of $94,383 ($65,000 + $29,383) would be considered “eligible pension income” for purposes of section 60.03 of the Act.

Scenario 2

The facts for this scenario are as follows:
*     The Plan member is 67 years old.
*     The Plan member receives $30,000 in pension income from an RPP.
*     The Plan member receives $8,000 in life annuity payments from an RCA.  The RCA provides benefits which supplement benefits provided under the above-noted RPP in respect of the same period of employment.

With respect to the amounts received by the Plan member from the RPP, the entire $30,000 of RPP payments received would be eligible for pension income splitting. With respect to the amounts received by the Plan member out of or under the RCA, all of the conditions in the definition of “eligible pension income” under subsection 60.03(1) of the Act would be met and the amount that would be eligible for pension income splitting would be calculated as the lessor of:
*     the amount determined under condition 4(a) above :  $8,000, and
*     the amount determined under condition 4(b) above:  $94,383 – $30,000 = $64,383.
 

In this scenario, a total of $38,000 ($30,000 + $8,000) would be considered “eligible pension income” for purposes of section 60.03 of the Act.

We trust our comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CPA, CA
Manager
Deferred Income Plans Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2014

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2014