Principal Issues: [TaxInterpretations translation] (1) Can the taxpayer deduct a past service RPP contribution for taxation years in which the employment income was exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act? (2) How will the benefits be taxed?
Position: (1) Yes (2) Question of fact
Reasons: (1) The wording of paragraph 8(1)(m) is satisfied. (2) Guidelines on the taxation of employment income of Status Indians.
July 12, 2007
Shawinigan-South Tax Centre Headquarters
Validation Policies and Income Tax Rulings Directorate
Procedures Section
Attention: Ms. Lise Gélinas Michel Lambert, CA, M.Fisc.
(613) 957-89682007-024068
Registered pension plan
Past Service Contribution
This is further to your email of June 14, 2007, regarding the application of paragraph 8(1)(m) and the taxation of pension benefits to an Indian.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act"). In addition, the term "Indian" has the meaning attributed to it in the Indian Act.
The Facts
The taxpayer is an Indian.
For the 1979 to 1981 taxation years, the taxpayer's employment income was fully exempt from Part I income tax pursuant to paragraph 81(1)(a) and section 87 of the Indian Act. In 2006, only a portion of his employment income was exempt because he performed his work both on and off a reserve.
In 2006, the taxpayer made a contribution to a registered pension plan for prior service while a contributor to the plan (the "Contribution"). The years of service covered were 1979 to 1981. For the 2006 taxation year, the taxpayer claimed a deduction in respect of the Contribution.
The registered pension plan is the First Nations Public Security Pension Plan.
Your Questions
You wish to know whether the Contribution is deductible. You also asked about the taxation of the pension benefits he will receive in future years.
Our Opinion
Contributions to a registered pension plan are deductible from employment income pursuant to paragraph 8(1)(m). That deduction is the amount in respect of contributions to registered pension plans that, by reason of subsection 147.2(4), is deductible in computing the taxpayer’s income for the year. The fact that employment income from 1979 to 1981 was exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act is not in itself determinative of the taxpayer's entitlement to the paragraph 8(1)(m) deduction in 2006. Consequently, we are of the view that the Contributions may be deducted in computing the taxpayer's taxable employment income in 2006 to the extent permitted by subsection 147.2(4).
Regarding the amount that is exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act, we refer you to the Agency's website at: http://www.cra-arc.gc.ca/aboriginals/status-f.html#heading4. It states the following: [TaxInterpretations translation]
Expenses such as union dues and registered pension plan contributions are deducted from the particular source of employment income to which they relate. The net amount of this employment income will be exempt from tax if the employment income is considered to be located on a reserve. Any expenses that relate to tax-exempt employment income cannot be deducted from other sources of taxable employment income.
Consequently, in determining the amount that is exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act, we are of the view that the taxpayer will have to subtract from the taxpayer’s gross employment income earned on a reserve the expenses that relate to that gross income. Where an expense relates to both on-reserve and off-reserve income, we are of the view that the taxpayer must prorate the expense in question to determine the taxpayer's net employment income that is exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act. That proration reflects the percentage of work performed on the reserve.
Regarding the taxation of pension benefits, we refer you to the Agency's website at: http://www.cra-arc.gc.ca/aboriginals/status-f.html#heading4. With regard to employment-related income, it states the following: [TaxInterpretations translation]
The following payments are 'employment-related income'. For tax purposes, this particular income is treated in the same way as the employment income that entitled you to receive it:
- Employment Insurance benefits
- Canada Pension Plan benefits
- Quebec Pension Plan benefits
- registered pension plan benefits
- retiring allowances
- wage loss replacement plan benefits
In other words, if your employment income is exempt from tax under section 87 of the Indian Act, your "employment income" will also be exempt. If part of your employment income is exempt, so is any "employment income" that this exempt income entitles you to receive.
In the section on Guidelines for the taxation of Indian employment income at: http://www.cra-arc.gc.ca/aboriginals/guidelines-f.html, the Agency gives the following example:
Mrs. V worked for a public health office located in a city off reserve. Throughout her career, one-fifth of her annual employment income was exempt from income tax because she spent one day a week performing her duties at a clinic on a nearby reserve. Upon retiring, Mrs. V received a retiring allowance from her employer and started receiving Canada Pension Plan payments. One-fifth of her retiring allowance and one-fifth of her Canada Pension Plan payments will not be subject to income tax.
The question of what portion of the pension benefits will be exempt from tax can only be resolved after considering all the relevant facts. However, we are of the view that the above stated principles will apply to the taxpayer. The fact that contributions were deducted in 2006 against employment income for that year for service in years where the taxpayer's employment income was exempt from Part I tax under paragraph 81(1)(a) and section 87 of the Indian Act is not a determining factor in determining the portion of the benefits that will not be taxable under those provisions.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.