Principal Issues: [TaxInterpretations translation] How to determine the percentage of benefits that is tax-exempt when those benefits arise from contributions attributable partly to taxable employment income and partly to exempt employment income.
Position: Question of fact.
Reasons: Where a period of service is taken into account for the purpose of determining the benefits payable, the exempt percentage of employment income earned during the relevant period of service must be taken into account in order to determine the exempt percentage of pension benefits. Where no period of service is taken into account in determining the benefits payable, it is reasonable to refer to the tax treatment of the Status Indian's employment income immediately before the commencement of the benefit payment.
XXXXXXXXXX 2008-028614 Mélanie Beaulieu October 30, 2008
Dear Sir,
Re: Prorating Rule Applied to Retirement or Pension Benefits Partially Exempt from Income Tax under the Indian Act
This is further to your email of July 9, 2008, in which you asked for clarification regarding the taxation of superannuation or pension benefits received by a Status Indian, where such benefits relate to contributions attributable partly to taxable employment income and partly to exempt employment income. In particular, you asked how to determine the percentage of retirement or pension benefits that are exempt in such a context.
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, available on our website at http://www.cra-arc.gc.ca/E/pub/tp/ic70-6r5/ic70-6r5-e.html, it is not the practice of this Directorate to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should forward all relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments that may be of assistance to you.
Our Comments
The “Indian Act Exemption for Employment Income Guidelines” (the "Guidelines"), available on our website at http://www.cra-arc.gc.ca/brgnls/gdlns-eng.html, provide a "Proration Rule" whereby, when less than 90% of the duties of an employment are performed on a reserve and the employment income is not exempted by another guideline, the exemption is to be prorated based on the percentage of duties performed on the reserve. In addition, these same Guidelines also provide that income related to employment, such as unemployment benefits, retiring allowances, Canada or Quebec Pension Plan payments and benefits from a registered pension plan or wage loss replacement plan, will generally be exempt from tax if the employment that gives rise to those amounts was itself exempt. If part of the employment income was exempt, then an equivalent part of those employment-related amounts will be exempt.
In cases where a Status Indian has, over the course of his or her career, earned different employment income subject to the Proration Rule according to different percentages, it may be difficult to determine what percentage should be allocated to the exempt portion of the employment income, in this case retirement or pension benefits.
In cases where a period of service is taken into account for the purposes of determining the benefits payable, it is reasonable to consider the exempt percentage of employment income earned during the relevant period of service in order to determine the percentage to be allocated to the exempt portion of employment-related income.
Thus, for example, when determining the exempt percentage of unemployment benefits received by a Status Indian, the CRA generally determines the ratio of all exempt employment income earned in the 52 weeks preceding the claim for benefits to the total employment income earned in the same period, since this is the relevant reference period under the Employment Insurance Act. This same ratio will determine the percentage of unemployment benefits that will be tax-exempt. Similarly, since benefits relating to maternity and parental leaves are governed by the Employment Insurance Act, the percentage exempt from any additional benefits paid by the employer in respect of such leaves will be determined in the same manner. Also, by analogy, when determining the exempt percentage of superannuation or pension benefits received by a Status Indian, reference should be made to the exempt percentage of employment income earned in each year in which contributions were made or in which superannuation or pension benefit credits accrued. This calculation can be complex, but you can refer to your Tax Services Office for assistance in making this determination.
There may, however, be situations where no period of service is taken into account for the purpose of determining the benefits payable. This may be the case, for example, in the context of a long-term disability insurance plan whose coverage comes into effect when the employee is hired and whose benefits depend on the employee's annual salary at the time the benefit period begins. In such a case, we are of the view that in order to determine the exempt percentage of benefits, reference must be made to the employment of the Status Indian at the time the disability occurs. If, at that time, the Status Indian's employment income is 40% exempt, then this percentage will also apply to disability insurance benefits.
We are of the view that this approach will be reasonable in the majority of cases, although we are aware that there may be situations where extenuating circumstances may make it appropriate to consider a longer period in order to determine the percentage applicable to the exempt portion of the benefits.
We hope that our comments are of assistance.
Best regards
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.