| 19(1) | 5-9119 |
| A.B. Adler | |
| (613) 957-8962 |
December 5, 1989
Dear Sirs:
This is in reply to your letter dated November 17, 1989 in which you raised a number of questions on behalf of a client regarding the purchase of periods of prior service under a defined benefit registered pension plan (RPP).
In particular you are concerned about a purchase of periods of prior service under an RPP where such service was with an individual's current employer and the individual was not a contributor to that RPP. You provided the following scenario for our consideration.
We are to assume an employee has a total of four years of past service with his employer during which he was not a contributor to his employer's RPP. Further, he elects to purchase this period of past service at a cost of $16,000 and is given the following options for the purchase, namely
(i) a single lump sum payment of $16,000,
or (ii) equal monthly payments of $315 (including interest) over a sixty month period.
As indicated in paragraph 23 of our Information Circular No. 70-6R2 we do not provide written opinions on proposed transactions. However, we are prepared to provide you with the following general comments.
(i) A lump sum payment to an RPP to purchase past service as described in the above scenario would be deductible under existing subparagraph 8(1)(m)(ii) of the Income Tax Act ("Act") in the amount of $3,500 in 1989. Further, the balance of $12,500 will be available to be carried forward to future years by reason of the combined application of that provision and existing subsection 8(8) of the Act. (Note that under the proposed Pension Reform legislation the detailed rules in paragraph 8(1)(m) and subsection 8(8) of the Act will be transferred to new provisions of the Act. However, we understand that their application will remain essentially unchanged from that of the existing rules.)
(ii) Commencing in 1989, the full amount of instalment payments (including interest) made to the RPP to acquire past service thereunder will be treated as deductible contributions under paragraph 8(1)(m) of the Act within the limits thereunder, and any undeductible portion for a year will be available for carryforward treatment under subsection 8(8) of the Act.
(iii) Provided that an employee's registered retirement savings plan (RRSP) permits a transfer of its property to another registered plan, then the property in that RRSP may be transferred say in 1989 directly to an RPP under subsection 146(16) of the Act in order to acquire past service thereunder.
Note that the Honourable Michael Wilson, Minister of Finance, announced on November 29, 1989 that he intended to table the Pension Reform legislation on December 11, 1989. We suggest that you review the proposed legislation when it is available with the view to satisfy yourself that our general comments continue to be valid thereunder.
We trust that our comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate