| 19(1) | File No. 5-8730 |
| W.C. Harding | |
| (613) 957-3499 |
October 24, 1989
Dear Sirs:
Re: Registered Retirement Savings Plans (RRSPs) Deductibility of premiums
This is in reply to your letter of May 3, 1989 in respect of the application of subsection 146(5) of the Income Tax Act (the "Act") to limit contributions to an RRSP by an individual who is a member of a superannuation fund and has accumulated his maximum percentage benefit under the terms of the fund.
In your case an individual's pension is a percentage of the employee's average salary, to a maximum of 70%, for the "best" 5 years of his final 12 years of service. The employer does not contribute to the fund on an annual basis but pays of the employee's benefit entitlements.
You have requested our opinion as to:
1. whether or not an employee who has retired in a given year and has reached his or her maximum pension entitlement in a previous year would be permitted to contribute the lesser of $7,500 and 20% of earned income in accordance with paragraph 146(5)(b) of the Income Tax Act, since no amount would be credited by the employer to the Fund in respect of his or her employment for the year of retirement; and
2. whether or not an employee who has not retired in a given year but who has reached his or her maximum pension entitlement in any given year would be entitled to the same treatment.
Paragraph 7 of Interpretation Bulletin IT-l24R5 indicates that where an individual is an employee and belongs to a pension fund under which no other person will contribute in respect of the employee's services in a taxation year, the limits contained in paragraph 146(5)(b) of the Act will apply. The paragraph goes on to state:
"This is so even where further contributions or credits are made into the fund or plan on the individual's behalf in (these) subsequent years in respect of the taxpayer's earlier service".
It is our opinion that in the circumstances described, the employer's contributions will be made in respect of years up to and including the taxation year in which the employee reached his maximum percentage pension. Accordingly, a former employee in situation I above would be entitled to the deduction limitations of paragraph 146(5)(b) of the Act for all subsequent years. An employee in situation 2, above, would also be entitled to use that provision but only with respect to taxation years after the year in which the maximum percentage is reached. For that year and all preceding years, the employee would be limited by the provisions of paragraph 146(5)(a) of the Act.
We trust this reply is satisfactory to your needs.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate