2022-0930501E5 Taxation of RCA Amounts and Marriage Breakdown

Principal Issues: Whether the CRA position described in paragraph 11 of IT-499R on the taxation of pension benefits can be extended to amounts paid out of a RCA in the context of a marriage breakdown such that such amounts would only be included in the income of the recipients of such amounts in the year of receipt.

Position: No.

Reasons: The taxation of pension benefits described in paragraph 11 of IT-499R is pursuant to paragraph 56(1)(a), which requires the inclusion of pension benefits in the income of a taxpayer in the year in which such benefits are received by the taxpayer. In contrast, amounts paid out of a RCA are taxed pursuant to paragraph 56(1)(x). Unlike paragraph 56(1)(a), the inclusion of such amounts in the income of a particular taxpayer under paragraph 56(1)(x) does not require that taxpayer to have received the amounts.

Author: Koh, Kah Foo
Section: 56(1)(a); 56(1)(x); 56(1)(z)

XXXXXXXXXX                                                                2022-093050
                                                                                       Kah Foo, Koh


December 5, 2022


Dear XXXXXXXXXX:

Re: Taxation of Payments from a retirement compensation arrangement on the breakdown of a marriage

This is in reply to your request for a technical interpretation dated March 15, 2022. You have asked whether the CRA’s position with respect to the taxation of pension benefits received as a result of marriage breakdown may be extended under similar circumstances to amounts paid out of a funded supplementary executive retirement plan, i.e., a retirement compensation arrangement (“RCA”), as defined in subsection 248(1). (footnote 1)

In particular, where there is a division of an amount, which includes a return of contributions, paid out of a RCA (“RCA Amount”) on a marriage breakdown, you wanted to know if the portion of the RCA Amount received by each spouse or former spouse can be included in the income of that recipient rather than in the income of the RCA beneficiary.

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 70-6R11, 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” (“IT-499R”), as follows:

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). The above tax treatment applies even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payments.

We also generally consider subsections 56(2) and (4) to be inapplicable to the division of pension benefits on a marriage breakdown.

Pursuant to the preamble to paragraph 56(1)(a), pension benefits are only included in the income of a taxpayer for the taxation year in which they are received. In addition to pension benefits, other amounts described in subparagraphs 56(1)(a)(ii) to (viii), such as retiring allowances and death benefits, are also included in a taxpayer’s income for a taxation year only when the amounts are received in that year.

The taxation of a RCA Amount does not fall within the ambit of paragraph 56(1)(a) but is instead governed by paragraphs 56(1)(x) to (z). Pursuant to paragraph 56(1)(x), when a taxpayer or another person receives a RCA Amount in a taxation year that can reasonably be considered to have been received in respect of an office or employment of the taxpayer, that RCA Amount is required to be included in the taxpayer’s income for that year. This general rule is subject to a limited exception when the RCA Amount is required to be included in that other person's income for that year under paragraph 12(1)(n.3).

In contrast to paragraph 56(1)(a), paragraphs 56(1)(x) and (y) do not require the RCA member to have received the RCA Amount, or a portion thereof, in order for that amount to be included in the RCA member’s income. Moreover, neither the text of paragraph 56(1)(x) nor the legislative scheme set out in paragraphs 56(1)(a), (x), (y) and (z), would permit CRA to interpret those provisions so as to permit a RCA Amount to be taxed in the manner described in paragraph 11 of IT-499R (i.e., solely on the basis of receipt), even within the context of a marriage breakdown.

As you know, the Department of Finance Canada is responsible for tax policy and making legislative amendments to the Act, while the CRA is responsible for administering the tax system and applying duly enacted legislation. Changing the legislation to allow for parallel treatment of pension benefits and amounts received from an RCA, as you suggest, would be the responsibility of the Department of Finance. You may wish to consider writing to the Honourable Chrystia Freeland, Minister of Finance, for her consideration at 90 Elgin Street, Ottawa, Ontario, K1A 0G5.

We trust our comments will be of assistance.

Yours truly,



Helen Ferrigan
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch


FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 All legislative references in this letter are to the Income Tax Act (Canada).

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