| 24(1) | 5-902922 |
| N. Goldstein | |
| (613) 952-9853 |
19(1)
December 14, 1990
Dear Sirs:
We are responding to your letter of October 15, 1990 and our telephone conversation of November 30, 1990 in which you requested our interpretation of subsection 8(7) of the Income Tax Act (the "Act") and Interpretation Bulletin 167R5 as it relates to the buy-back of pensions by teachers. In particular, you requested our interpretation on the maximum amount deductible in a year for past service contributions where the amount required to be contributed to the Registered Pension Plan ("RPP") exceeded $3,500 and included interest. You also requested our views on the maximum amount which could be contributed as a past service contribution for a particular year where the teacher had previously contributed and deducted for current services an amount less than $3,500 in that year.
Under legislation applicable to the 1990 taxation year, it is our view that in addition to the current service deduction that a teacher may claim under subparagraphs 8(1)(m)(i) and 8(1)(m)(i.1), the teacher may also claim a deduction under subparagraph 8(1)(m)(ii) of the Act of up to $3,500 for a contribution to a RPP in respect of past services for a year regardless of whether the teacher was a contributor to the RPP in that previous year. However Clause 8(1)(m)(ii)(B) of the Act provides that the maximum total deduction that an individual may make over any number of years under subparagraph 8(1)(m)(ii) of the Act is limited to $3,500 multiplied by the number of calendar years during which the individual was eligible to contribute to the plan.
For example, if a teacher made contributions for 10 years of past services, the maximum deduction would be $35,000, deductible at a rate of $3,500 per annum for 10 years. The $35,000 amount is the maximum deduction regardless of the fact that a teacher may have to contribute $50,000 to the RPP to be eligible to purchase 10 past service years under the terms of the plan. In the foregoing example, it is our view that it is not relevant that part of the maximum deduction of $35,000 may be interest as long as the entire amount is a contribution to a RPP.
We interpret the combination of subsection 8(7) of the Act and subparagraph 8(1)(m)(ii) of the Act as permitting a teacher to contribute and deduct $3,500 per year in respect of past service years regardless of whether the teacher had, in those years, actually contributed current service contributions. The restrictive provision of subparagraph 8(1)(m)(iii), which would normally limit past service deductions to 3,500 minus the aggregate any contributions in the year for current services and any contributions for past services in respect of years in which the employee was not a contributor to the RPP, is not applicable due to the provisions of subsection 8(7) of the Act.
For 1991 and subsequent year, subparagraphs 8(1)(m)(ii) and (iii) are repealed and replaced by paragraphs 147.2(4)(b) and 147.2(4)(c) and subsection 8(7) is repealed and replaced by subsection 147.2(5). Subsection 147.2(5) of the Act provides a similar result to subsection 8(7) in that a teacher who makes or has made contributions to a RPP in respect of service years before 1990 may deduct these contributions in accordance with the rules in new subparagraph 147.2 (4)(b) even though the teacher was a contributor to the plan in the year in respect of which the contributions were made. Accordingly the teacher would be entitled to a past service deduction of up to 3,500 in addition to any current service contribution made in the year. The special rule in subsection 147.2(5) is applicable to the 1991 to 1994 taxation years only after which time the teacher who has made a past service contribution in respect of years before 1990 in which he or she was a contributor to any RPP would be subject to the rules in paragraph 147.2(4)(c) of the Act.
While we trust the foregoing comments are of assistance to you, they do not constitute an advance income tax ruling and are not binding on the Department.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate