Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: 1. Whether paragraph 20(1)(c) applies to interest in respect of money borrowed from a lending institution used by an employee to make past service contributions to a registered pension plan (“RPP”). 2. Are past service contributions to an RPP that are paid in instalment payments (including interest) deductible?
Position: 1. No. 2. Yes.
Reasons: 1. There is no provision to allow for interest deductibility on such payments. Paragraph 18(11)(c) denies the deduction under paragraph 20(1)(c) where the funds are borrowed for the purposes of making a contribution to an RPP after November 12, 1981. 2. Commencing in 1989, if a past service contribution to an RPP is paid in instalments, the full amount of instalment payments (including interest) will be treated as pension contributions. Such contributions are deductible subject to the limitations in subsection 147.2(4).
Author: Serdyukova, Yaroslavna
Section: Paragraphs 20(1)(c), 18(11)(c), 8(1)(m)
December 4, 2020
Re: Pension buyback interest expense
This is in reply to your correspondence of October 27, 2020, in which you asked for our opinion on whether the interest on money borrowed from a lending institution to make past service contributions to a multi-employer registered pension plan (“RPP”) is deductible under subparagraph 20(1)(c)(i) of the Income Tax Act (the “Act”).
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.
Subparagraph 20(1)(c)(i) of the Act provides a deduction for an amount paid in the year or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income), pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property, with certain exceptions.
You have indicated that the borrowed money will be used to make past service contributions to a multi-employer RPP. Paragraph 18(11)(c) of the Act denies the interest deduction under paragraph 20(1)(c) of the Act where the funds are borrowed for the purposes of making a contribution to an RPP after November 12, 1981, with one exception. A deduction is available to an employee for the interest in respect of borrowed money used to make past service contributions (described in subparagraphs 8(1)(m)(ii) and (iii) as they apply to the 1990 taxation year) if the contributions are required to be made under an obligation entered into before November 13, 1981. Based on the foregoing, the interest is not deductible on the money borrowed from a lending institution for the purposes of making past service contributions to an RPP.
In your correspondence, you also indicated that the multi-employer RPP offers a financing option to buy back past service. In this regard, it should be noted that if a past service contribution to a defined benefit plan is paid in instalments, each instalment payment will normally consist of the basic contribution for the past service, accrued interest (interest that would have been payable had the past service contribution been made in a lump sum) and an instalment interest charge. As a result of the decision in the case of Arthur E. Walton v. The Minister of National Revenue, 89 D.T.C. 423, for the 1989 and subsequent taxation years and with respect to both accrued interest and instalment interest charges paid in the year, such amounts are considered to be part of the pension contribution and are deductible, subject to the limitations in subsection 147.2(4) of the Act. Accordingly, to the extent that a taxpayer buys back past service through an RPP payment plan, the monthly installments, including interest, made to an RPP to acquire past service will be considered to be part of the pension contribution and will be deductible, subject to the limitations in subsection 147.2(4) of the Act.
We trust our comments will be of assistance.
Partnerships and Corporate Financing Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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