Principal Issues: Where a LIF income recipient is under the age of 65, would he/she be eligible for the pension tax credit or pension income splitting in the circumstances?
Position: No
Reasons: The wording of the legislation
2008-028256
XXXXXXXXXX Kimberly Duval, CA
(613) 599-6054
December 9, 2008
Dear XXXXXXXXXX :
Re: Pension Tax Credit and Payments out of a Life Income Fund
We are writing in response to your e-mail correspondence of June 18, 2008, requesting further comments concerning the ability of a taxpayer to claim the pension tax credit with respect to various types of pension income. In particular, you have asked for our written comments with respect to the following questions, based on the assumption that the individual recipient is 55 years of age:
1. Where an individual receives pension income under a defined benefit pension plan, will the income be considered "qualified pension income" for purposes of the Income Tax Act (the "Act")?
2. Where the same individual receives income from a Life Income Fund, a Registered Retirement Income Fund or another annuity, will this income be considered "qualified pension income" for purposes of the Act?
3. Where an individual receives a lump sum pension payment and the payment is in excess of the individual's pension benefit under a defined benefit pension plan that may be directly transferred to a Register Retirement Savings Plan ("RRSP") or Registered Retirement Income Fund ("RRIF"), can this cash payment be split between the individual and his/her spouse?
Written confirmation of the tax implications inherent in particular transactions can be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.
The Act allows a taxpayer under 65 years of age at the end of the calendar year to claim a pension tax credit and to split eligible pension income with his or her spouse or common-law partner if the taxpayer has received qualified pension income. The Act specifically defines "qualified pension income" to mean life annuity payments out of a registered pension plan and payments out of an RRSP or a RRIF that are received due to the death of the taxpayer's spouse or common-law partner. Any other amounts paid out of an RRSP or a RRIF to a taxpayer under 65 years of age are not included in the definition and as such, are not eligible for the pension tax credit and pension income splitting.
Accordingly, for purposes of question 1 and 2 above, a taxpayer under 65 receiving pension income from a defined benefit pension plan would generally be eligible for the pension tax credit; however, the same individual receiving RRSP or RRIF payments, other than as a result of the death of the taxpayer's spouse or common-law partner, is not eligible for the pension tax credit for these payments and is not eligible to split these payments with his or her spouse or common-law partner. Further, although the term Life Income Fund ("LIF") is not defined in the Act, a LIF is generally registered as a RRIF and therefore, subject to the legislation governing RRIFs in the Act.
A lump sum pension payment, in excess of the pension benefit that may be transferred directly to an RRSP or a RRIF, from a defined benefit pension plan would be taxable to the individual in the year received. For purposes of question 3 above, this type of income would not be eligible to be split with the taxpayer's spouse as the amount would not be considered "qualified pension income" for purposes of the pension income splitting legislation under the Act. However, the individual may consider contributing the amount received into a spousal RRSP, provided the taxpayer has sufficient RRSP contribution room available.
We trust our comments will be of assistance to you.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch