Principal Issues: Is the pension adjustment reversal (PAR) amount of a status Indian reduced by exempt income pursuant to 81(1)(a) of the Act?
Position: no
Reasons: wording of the legislation, specifically the term "compensation"
2006-016543 XXXXXXXXXX Kimberly Duval (613) 599-6054 April 6, 2006
Dear XXXXXXXXXX:
Re: Pension Adjustment Reversal - Status Indian
This is in response to your letter of January 3, 2006 requesting our comments concerning the calculation of an individual's pension adjustment reversal (PAR) amount in certain circumstances. Specifically, you have asked us to confirm that where a status Indian terminates his or her participation in an employer's pension plan, the calculation of the individual's PAR amount will be based on total pensionable earnings, including earnings which may have been exempt from tax pursuant to paragraph 81(1)(a) of the Income Tax Act (the "Act").
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is this Directorate's practice to only comment on proposed transactions involving specific taxpayers in the form of an advance income tax ruling. Since your specific situation appears to involve a completed transaction, we are prepared to provide the following general comments, which may be of assistance.
The mechanism used to value annual benefits earned or accrued to each member of an employer-sponsored plan, such as a registered pension plan or deferred profit sharing plan, is the pension adjustment (PA) amount. This PA amount reduces the maximum amount that the individual may contribute to an RRSP for the following year. However, where an employee's membership in such a plan stops and the termination benefit received by the employee is less than the sum of prior years PA amounts that have been reported to the CRA, an adjustment is required to restore the individual's contribution room to his or her RRSP. This adjustment is referred to as the PAR.
An individual's PA amount is calculated using fairly complex formulas based on future pension benefits. Subparagraph 147.1(8)(a)(ii) of the Act requires that a PA for any given year cannot exceed 18% of the employee's compensation from the employer for the year. The term "compensation" is defined in subsection 147.1(1) of the Act to mean, and include among other things, the total of amounts each of which is an amount from an office or employment that is required by sections 5 and 6 of the Act to be included in the employee's income or would be required to be included in the employee's income but for paragraph 81(1)(a) of the Act as it applies with respect to the Indian Act. As such, the full amount of a status Indian's employment income, whether or not exempt from Part I tax pursuant to 81(1)(a) of the Act, would be utilized in the computation of the PA amount of an individual.
Where a status Indian terminates participation in an employer-sponsored registered pension plan (an RPP), it is our view that the same rationale would apply for purposes of calculating the PAR amount as discussed above in the context of the PA amount. In other words, where the termination benefit received by a status Indian on termination of an RPP is less than the total of all PA amounts originally reported to the CRA, the calculation of the PAR amount would be based on total compensation, which would include earnings which may have been exempt from tax pursuant to paragraph 81(1)(a) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
John Oulton, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch