2019-0811621E5 Exempt Employment income and Pension Buyback

Principal Issues: An individual was exempt from tax on their employment income by virtue of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. The individual terminated their employment, and transferred the cumulative value of their registered pension plan (RPP) to a registered retirement savings plan / locked in retirement account (RRSP/LIRA). The individual then re-purchased this period of service using the tax exempt funds held in the RRSP/LIRA. Would the RPP payments from the pension buyback be tax exempt?

Position: Yes.

Reasons: In our opinion, since the funds used to repurchase the past service were from the RRSP/LIRA from the original RPP, that portion of the RPP payments relating to the exempt period would remain tax exempt.

Author: Gauthier, Michel
Section: 81(1)(a); Indian Act s.87

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                                                                                           2019-081162
                                                                                           M. Gauthier

February 22, 2021

Dear XXXXXXXXXX:

Re: Exempt Employment Income and Pension Buyback

This is in reply to an email received from your organization describing a situation where an individual was exempt from tax on their employment income for the years 2000-2002 by virtue of section 87 of the Indian Act and paragraph 81(1)(a) of the Income Tax Act. The individual terminated their employment and transferred the cumulative value of their registered pension plan (RPP) to a registered retirement savings plan / locked in retirement account (RRSP/LIRA).

The individual then re-purchased this period of service using the tax exempt funds held in the RRSP/LIRA. You indicated that the qualifying transfer resulted in no past service pension adjustment (PSPA) being calculated. You asked us whether the 2000-2002 period in the individual’s defined benefit pension plan would still be considered tax exempt.

Our Comments:

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 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

On the Canada.ca website on the page titled Information on the tax exemption under section 87 of the Indian Act, it states the following with regards to pension plan payments and transfers to an RRSP:

Registered pension plan benefits

If you receive registered pension plan (RPP) benefits as a result of employment income that was exempt from income tax under section 87 of the Indian Act, the RPP benefits will also be exempt from income tax. If a portion of your employment income was exempt, then a similar portion of the related registered pension plan benefits will be exempt from income tax.

Pension transfers from an RPP to an RRSP/RRIF

If you transferred an amount from your registered pension plan (RPP) to a registered retirement savings plan (RRSP), and the registered pension plan related to employment income that was wholly or partially exempt from income tax under section 87 of the Indian Act, the amounts you receive from the RRSP will also be wholly or partially tax-exempt in the same proportion. This also applies to payments from a registered retirement income fund (RRIF). Any RRIF payments you receive will be taxed in the same manner as payments from the particular registered plan from which property was transferred to the RRIF.

In your situation, the individual, after transferring the cumulative value of their RPP to an RRSP/LIRA, had performed a pension buyback for the years 2000-2002. The funds used to re-purchase this past service period were from that same RRSP/LIRA .

In our opinion, since the funds used to repurchase the past service were from the RRSP/LIRA who received the amount from the RPP, the portion of the RPP payments relating to the exempt period would remain tax exempt. Furthermore, any amounts that remain in the RRSP/LIRA (i.e., after the pension buyback) that were derived from exempt income would remain tax exempt when withdrawn from the RRSP/LIRA.

We trust that these comments will be of assistance.

Yours truly,

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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