2015-0601081I7 Indian Income - Pension Transferred on Divorce

Principal Issues: Whether benefits of a pension plan transferred on divorce remain exempt from tax.

Position: Yes, in this situation.

Reasons: See below.

Author: Meers, Rob
Section: 87 of the Indian Act; 81(1)(a) and 56(1)(a) of the Income Tax Act

                                                                                November 26, 2015

Assessment, Benefit, and Service Branch              IT Rulings Directorate
Individual Programs Support Section                      R. Meers
395 Terminal Ave, 4th Flr, Rm 4008A                     613-670-9037
Ottawa ON  K1A 0L5

Attention:  Chantal Roy                                           2015-060108

      Indian Income – Pension Transferred on Divorce

This is in response to your email dated July 21, 2015, inquiring as to whether the income of an Indian, as that term is defined in section 2 of the Indian Act, would be situated on a reserve and thus exempt from tax for purposes of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the “Act”). In particular, you have asked us to comment on whether pension benefits received by a former spouse as the result of the breakdown of a marriage are exempt from tax.

FACTS

The following is our understanding of the facts:

*     The taxpayer and her former spouse are both Indians.
*     The former spouse receives pension income that is exempt from income tax as it is received as a result of employment income that was exempt from tax.
*     The couple is divorced and, as part of the divorce settlement, the taxpayer is entitled to half of the former spouse’s benefits under a registered pension plan (“RPP”).
*     The taxpayer’s entitlement to an undivided interest in the pension is conferred to her pursuant to relevant provincial legislation in respect of the breakdown of a marriage.
*     The taxpayer has transferred her interest in the RPP to a registered retirement savings plan (“RRSP”).

COMMENTS

Our position regarding the taxation of pension benefits received as a result of a marriage breakdown is stated in paragraph 11 of Interpretation Bulletin IT-499R Superannuation or Pension Benefits as:

“If there is a division of pension benefits on a marriage breakdown, generally the pension benefits legislation of a province provides the terms under which a portion of the pension benefits of a member of a pension plan may be paid to a spouse or former spouse under a domestic contract, a written separation agreement, or under a divorce decree or court order under a provincial family law act relating to a division of property on the breakdown of the marriage. Upon a division of pension benefits in these circumstances,
the portion received by each spouse or former spouse at a time permitted under the pension benefits legislation of the province is included in the income of that spouse or former spouse as a pension benefit under subparagraph 56(1)(a)(i).”

We are of the view that these comments apply to situations where the relevant provincial legislation confers title to an undivided interest in each family asset to each spouse (including a former spouse). Therefore, if a division of the pension rights occurs, that is, if each spouse has a proprietary interest in the pension benefits and is legally entitled to the pension income, each spouse would be required to include in income for a taxation year their respective share of the pension benefits under subparagraph 56(1)(a)(i) of the Act. The portion taxable to each spouse represents each spouse's interest in the pension and is usually prescribed by the relevant provincial legislation and provided in the written separation agreement, the divorce decree or court order.

With respect to the taxation of pension income of an Indian, our views are reflected in the Indian Act Exemption for Employment Income Guidelines. In short, income that is ancillary to employment income, such as pension income, is treated the same as the employment income itself such that the receipt of RPP benefits will usually be exempt from income tax when received as a result of employment income that was exempt from tax. If a portion of the employment income was exempt, then a similar portion of the RPP benefits will also be exempt.

Furthermore, it is our view that pension benefits received by a former spouse on the breakdown of a marriage will also be exempt from tax provided the former spouse is an Indian and the benefits relate to their proprietary interest in the pension relating to a former spouse’s tax-exempt employment income. Note the exemption from taxation under the Indian Act only applies to Indians. In situations where an Indian transfers an amount from their RPP to an RRSP, if that pension income was wholly or partially tax exempt then payments from the RRSP will also be wholly or partially tax exempt in the same proportion. The same rule applies to payments from a registered retirement income fund (“RRIF”).  If the RRIF was the result of the conversion of an RRSP which was created from the transfer of an amount from a RPP, the tax treatment of the pension income flows through to the payments from the RRIF. 

Please note that the normal withholding requirements apply to the RRSP withdrawal even when the withdrawal is made by an Indian. To be exempted from the applicable withholding taxes, the Indian annuitant must apply for a waiver from her Tax Services Office.

CONCLUSION

Based on the comments above, it is our view that any pension benefits paid to the taxpayer would be exempt from tax. The amount received by her represents her interest in the pension. The pension is ancillary to an Indian’s employment income that was exempt from tax and she is an Indian. The payments from the taxpayer’s RRSP should also be exempt to the extent that they relate to the transfer of the RPP to her RRSP.

We trust that these comments will be of assistance.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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