8 May 1990 Income Tax Severed Letter ACC9091 - Employer-funded Past Service Pension Benefits

May 8, 1990

Registration Directorate            Financial Industries Division
Registered Plans Division           Wayne Harding
Sharon Yetts                        957-3499
Room 4004, 400 Cumberland

                                    900515
                                    Your file:  HAU 8224-0046

Subject: 24(1)

This is in respect of the above noted letter which you referred to Rulings Directorate on April 19, 1990.

We have considered 24(1) request for a reconsideration of your reply of January 29, 1990 and have concluded that it would be inappropriate for us to reply directly to them. We are instead addressing our comments to you for reply to 19(1).

In our opinion the provisions of proposed subsection 8503(21) of the Income Tax Regulations (the "Regulations") provide and were intended to provide for circumstances such as those being considered in this case. Paragraph 8503(21)(c) of the Regulations states that the provision will apply if:

"(c) it is reasonable to consider that all, or substantially all, of such portion of the contribution as is in respect of past service benefits was paid by the employer, with the consent of the member, in lieu of a payment or other benefit to which the member would otherwise be entitled,"

In the present situation the terminating employee has to choose and thereby "consent to" the employer's contribution to the pension instead of or "in lieu of" a severance payment which he will "otherwise" be entitled to under the terms of the agreement.

In our view Regulation 8503(21) is applicable where the allowance is not a prior entitlement but is offered concurrently, provided the employee has a right to receive it if he does not consent to the pension contribution. Our position also extends to amounts in excess of any statutory entitlements where these are provided under a joint or unilateral agreement.

At page 119 of the Explanatory Notes to Proposed Regulations Relating to Saving for Retirement, December 1989, it states that:

"Subsection 8503(21) contains a rule intended to prevent an employee from agreeing to reduced salary or wages or a reduced retiring allowance, or to forego some other payment or benefit, in return for employer-funded past service pension benefits in respect of pre-1990 service.

Employer contributions made to an RPP in these circumstances are, in substance, employee contributions.

Such an arrangement could circumvent the limits on past service employee contributions in new subsection 147.2(4) of the Act. The rule is intended to apply only where individual employees agree to forego salary or wages or other cash payments or benefits; thus, it would not apply where a union negotiates additional past service pension benefits instead of a larger increase in rate of pay.

In our opinion this supports our view that a retiring allowance is included under the provision where it is foregone in circumstances as discussed above. The noted exclusion for negotiated settlements is not applicable in this case since it applies only where an alternative amount is not, at the relevant time, an amount for which the employee could enforce payment.

for Director Financial Industries Division Rulings Directorate