2016-0668851E5 Indian Pension Income Transferred on Divorce

Principal Issues: Whether benefits of a pension plan transferred on divorce remain exempt from income tax under section 87 of the Indian Act.

Position: Depends on the facts.

Reasons: See below.

Author: Mahendran, Ananthy
Section: 81(1)(a) and 56(1)(a) of the Income Tax Act and 87(1)(b) of the Indian Act

XXXXXXXXXX                                                                                                                         2016-066885
                                                                                                                                                  A. Mahendran
                                                                                                                                                  (905) 721-5204
February 14, 2017

Dear XXXXXXXXXX:

Re: Tax Treatment of Pension Benefits Transferred on Divorce

This is in response to your email dated September 30, 2016, inquiring as to whether pension benefits received by your former spouse as the result of the breakdown of your marriage are exempt from tax under section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act (the “Act”).

Based on the brief information provided in your correspondence, we understand that you and your former spouse are Indians, as that term is defined in the Indian Act. You were entitled to receive a registered pension plan (“RPP”) benefit which originated from your employment income earned on a reserve. You transferred your benefit in the RPP to a registered retirement savings plan (“RRSP”). You and your spouse separated and, as part of your separation agreement, you transferred your RRSP benefit to your former spouse who lives on reserve.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation. 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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Our general 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.

Our general position regarding the taxation of RPP benefits of an Indian is provided in our webpage entitled “Information for Indians” at http://www.cra-arc.gc.ca/brgnls/stts-eng.html. In short, income that is ancillary to employment income, such as RPP benefits, is treated in the same way as the employment income itself. In other words, if the employment income is exempt from income tax under section 87 of the Indian Act, the RPP benefits will usually be exempt from income tax. If a portion of the employment income is exempt from income tax, then a similar portion of the RPP benefits will also be exempt from income tax.

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 his or her proprietary interest in the pension relating to his or her former spouse’s tax-exempt employment income. In situations where an Indian transfers an amount from his or her 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.

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 his or her Tax Services Office.

We trust that these comments will be of assistance to you.

Yours truly,

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment 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, 2017

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, 2017