Principal Issues: Will a lump-sum payment of pension benefits relating to prior years be considered a qualifying amount for purposes of the qualifying retroactive lump-sum payment rules in section 110.2 of the Act?
Position: Question of fact, but likely yes
Reasons: wording of the legislation
XXXXXXXXXX 2006-016689 Kimberly Duval (613) 599-6054 March 14, 2006
Dear XXXXXXXXXX:
Re: Qualifying Retroactive Lump Sum Payment
This is in response to your letter of January 13, 2006 requesting our comments as to whether payments made by the XXXXXXXXXX (the "Former Employer") to a number of its XXXXXXXXXX retirees could be considered qualifying retroactive lump-sum payments for purposes of section 110.2 of the Income Tax Act. You explain in your letter that the particular lump-sum payments were made in relation to an adjustment to the retirees' pension benefits in respect of the XXXXXXXXXX to XXXXXXXXXX taxation years. The Former Employer was under no legal obligation to pay the lump-sum amounts. XXXXXXXXXX.
Our Comments
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The term "qualifying retroactive lump-sum payment" is used on Form T1198E and is based on the rules in section 110.2 of the Act, which provides for a limited type of retroactive averaging of taxes payable on certain kinds of qualifying income exceeding $3,000. The qualifying retroactive lump-sum payment must be a qualifying amount received in 1995 or a subsequent year that relates to one or more years preceding the year of payment.
In your particular situation, the issue is whether the lump-sum payments made by the Former Employer would qualify under paragraph (b) of the definition of "qualifying amount" as an amount that is a superannuation or pension benefit. As defined in subsection 248(1) of the Act, a "superannuation or pension benefit" includes any amount received out of or under, a superannuation or pension fund or plan.
Whether a particular amount would be considered a payment in respect of a superannuation or pension benefit and included in income pursuant to 56(1)(a) of the Act, is ultimately a question of fact. It is the Canada Revenue Agency's position however, that payments made directly by a former employer and not necessarily by the pension plan itself, would not, in and of itself, exclude the amount as a superannuation or pension benefit payment. As such, provided the other requirements of the provision are satisfied, the lump-sum amount made by the Former Employer to retirees' in relation to pension benefits of prior years, may be considered a qualifying amount pursuant to the definition in section 110.2 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