N.R. Mitchell (613) 957-2134 December 14, 1987
Dear
Re: Tax Treatment of Pension Income
This is in reply to your letter of August 5, 1987, concerning the tax treatment that would be applicable in a number of specific situations involving pension income and recent Ontario legislation. We regret the delay in replying. We will deal with your questions in the order in which they appear in your letter.
1. The first situation you have described involves an employee who dies before he or she is entitled to any payments from the pension plan of which he or she is a member. The employee and his or her surviving spouse were cohabiting at the date of death. Pursuant to Section 49 of the Ontario Pension Benefits Amendment Act (PBA), the surviving spouse would be entitled to receive immediate payment of a lump sump equal to the commuted value of the deferred pension or to an immediate or deferred pension with a commuted value at least equal to the commuted yulue of the deferred pension which the deceased employee would have received. (We also assume that the pension plan of which the employee was a member would be a registered pension plan for the purposes of the Income Tax Act (the "Act".)
Based on the above, we would agree that the surviving spouse would be considered to receive the amount paid to him or her by the administrator of the plan as income under subparagraph 56(1)(a)(i) of the Act and, accordingly, would be permitted to transfer such amounts to a registered retirement savings plan pursuant to paragraph 60(j) of the Act. If this is done and on the condition that the surviving spouse provides the administrator of the plan with a duly completed Form TD2, no withholding on account of income tax will be required pursuant to paragraph 153(1)(b) of the Act.
2. You have asked us to consider the above situation with the following change: the deceased employee does not have a surviving spouse and has designated a beneficiary (as permitted by subsection 49(6) of the PBA) who will receive an amount equal to the commuted value of the deferred pension which the employee would have received. We would agree that the same tax treatment as was outlined in response to your first question would be applicable to the designated beneficiary.
Next, you have inquired about three situations involving "splits" of pension income between living spouses or ex-spouses.
3. Assuming a court order is made under the terms of the Ontario Family Law Act (FLA) requiring payment of a portion of an employee's pension benefit to his or her poorer spouse, we confirm that such amount would be included in the income of the poorer spouse pursuant to subparagraph 56(1)(a)(i) of the Act and would be eligible for transfer to an R.R.S.P. pursuant to paragraph 60(j) of the Act. Once again, no withholding on account of tax would be required if the poorer spouse submitted a duly completed Form TD2 to the administrator of the pension plan.
4. We would also confirm that the treatment outlined above would apply where there is a domestic contract providing for payment of a portion of the employee's pension benefit to his or her spouse and this provision is to take effect upon separation of the spouses.
5. Finally, you have proposed 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 his or her spouse. We would agree that a different treatment for tax purposes would be applicable in this case. In our view, the pension benefits received out of the plan would remain income of the employee alone under subparagraph 56(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.
As we see it, this result follows from the application of either subsections 56(2) or 56(4) of the Act. Accordingly, in the case at hand, the employee's spouse would not be entitled to make use of the provisions of paragraph 60(j) of the Act tp transfer any portion of these pension benefits to an R.R.S.P.
We trust these comments will be of assistance.
Yours truly,
ORIGINAL SIGNED BY ORIGINAL SIGNED PAR ROBERT H. JOYCE
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch