2019-0799191C6 CLHIA Q. 8 - IPPs and pension splitting

Principal Issues: Is the portion of the IPP minimum amount in excess of the member's lifetime retirement benefits under the plan eligible for pension income splitting under section 60.03?

Position: No.

Reasons: It is not a life annuity payment.

Author: Ferrigan, Helen
Section: ITA 60.03 and 118(7); ITR 8502(d)(x) and 8503(26)

CLHIA Roundtable – May 2019

Question 8 – Individual Pension Plans and Pension Splitting

Background

The 2011 Federal Budget introduced measures for Individual Pension Plans (“IPPs”) that generally parallel the “minimum amount”-based income withdrawal rules for Registered Retirement Income Funds (“RRIFs”), such that minimal withdrawals are required from an IPP if the plan member has attained age 71.

The definition of “permissible distributions” in paragraph 8502(d) of the Income Tax Regulations (“ITR”) seems to provide that the portion of the IPP minimum amount that is not described as a “payment of benefits in accordance with the plan as registered” is considered to be a “permissible distribution”.  This language suggests that an amount in excess of the “lifetime retirement benefit” that has been otherwise calculated does not qualify for pension splitting, as it does not appear to be “a payment in respect of a life annuity out of or under a superannuation or pension plan”, which would qualify as “pension income”, pursuant to the definition in subsection 118(7) of the Income Tax Act (Canada) (the “Act”).

Question

Does CRA view the above interpretation as being correct?

CRA RESPONSE

We agree with this interpretation.

Beginning in the calendar year in which an IPP member attains 72 years of age, ITR 8503(26) requires the IPP to make annual payments to the member that are at least equal to the member’s IPP minimum amount for the year. This means that if the total lifetime retirement benefits payable to the member in the year under the IPP’s terms is less than the IPP minimum amount, the IPP must make an additional payment equal to the difference. However, if the total is greater, no additional payment is required.

By virtue of the definitions “eligible pension income” and “pension income” in subsections 60.03(1) and 118(7) of the Act, the only type of payment from a defined benefit provision of a registered pension plan (such as an IPP) that is eligible for pension income splitting under section 60.03 is a life annuity payment. This includes lifetime retirement benefits paid to a member of an IPP.

However, any additional payment that an IPP may be required to make in a particular year to comply with the IPP minimum amount rules is not eligible to be split. Such a payment does not have the character of a life annuity payment. It is not part of a series of periodic payments payable for the member’s life. Whether an IPP must make such a payment has to be determined each and every year by reference to the current value of the IPP’s assets and an age-based factor. It has no relation to past or future payments.

Helen Ferrigan
2019-079919
May 14, 2019

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