8 September 1989 Income Tax Severed Letter AC74200 - Tax Treatment of Pension Income

19(1)                            M. Shea-DesRosiers
                                 (613) 957-8953

September 8, 1989

Dear Sirs:

Re: Tax Treatment of Pension Income

This is in reply to your letter of July 17, 1989 addressed to the Registered Pension and Deferred Income Plans Division which was forwarded to us for reply.

In order to answer your question we need distinguish between the situation of pension splits upon marriage breakdown and pension splits during the term of the marriage.

I. Matrimonial Breakdown

As stipulated in Information Circular IC- 72-13R8 at paragraph 9(c), "the commutation of accrued pension benefits attributable to a member's spouse as a result of a marriage breakdown is permitted, provided it is pursuant to a written agreement, decree, order or judgment of a competent tribunal.

Where pursuant to the provisions of the law of a province, there is a division of one spouse's rights (member spouse) under a Registered Pension Plan ("RPP") in favour of the other spouse (non-member spouse) on the breakdown of their marriage, it is our opinion that the payment of the portion of the RPP to the non-member spouse would be included in the income of the non-member spouse pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act") and would be eligible for transfer to a Registered Retirement Savings Plan ("RRSP") pursuant to paragraph 60(j) of the Act. No withholding on account of tax would be required if the non-m,ember spouse submitted a duly completed Form TD2 to the administrator of the pension plan. It should be noted that as of January 1, 1990, such a transfer of periodic pension payments (whether direct or indirect) will no longer be permitted.

II. Continuity of Marriage

Your letter seems to propose a situation in which a domestic contract effective during the term of the marriage provides for payment of a portion of an employee's pension benefits to hid or her spouse. In our view, the pension benefits received out of the pension plan would remain income of the employee (member spouse) under subparagraph 5(1)(a)(i) of the Act regardless of the contractual arrangement between the parties entitling the employee's spouse to a portion of these pension benefits. In such a case, the employee's spouse (non-member) would not be entitled to make use of the provisions of paragraph 60(j) of the Act to transfer any portion of these pension benefits to an RRSP.

We trust these comments will be of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate