11 September 1989 Income Tax Severed Letter AC74309 - Deductibility of Interest Element of Instalment Payments to RPP upon Election for Past Service

September 11, 1989

OTTAWA DISTRICT OFFICE                  HEAD OFFICE
Appeals Section                         Rulings Directorate
                                        Financial Industries
                                          Division
                                        W.C. Harding
                                        957-3499

ATTENTION: Claude St. Pierre

19(1)                                   7-4309

Enclosed please find the 1986, 87 and 88 T1 returns for the above-noted taxpayer which we are returning to you for processing.

The taxpayer elected to buy back prior years service for pension purposes and agreed to pay the cost of buyback through installments which included an interest element. Until recently the Department's position has been that this instalment interest element was not deductible in calculating income either as an interest expense or as a pension contribution deductible in accordance with the provisions of paragraphs 8(1)(m) and 60(j) of the Income Tax Act (the Act).

19(1) filed a notice of objection for the taxation years " 1986 and onward" and has supplied to the courts for an extension of time in order to have his objection considered. Should the courts determine that 19(1) objections may be considered we ask that you allow reassessments for each oft he years 1986 and 1987 on the basis of our new position. We also ask that you follow this position in assessing 19(1) 19888 and subsequent years, subject, however, to the proposed amendments to the Act under pension reform.

Based on the information available, and in line with our current position, 19(1) would be entitled to an 8(1)(m)(ii) deduction in each of the years 1976 to 1984 inclusive of the full amount of past service contributions (including instalment interest) paid in those years. To the extent that some of these amount were disallowed in accordance with our previous position the amounts should be accumulated and carried forward pursuant to 8(8)(c).

In 1985 19(1) apparently made past service contributions of 19(1). Of this, he was probably allowed an 8(1)(m)(ii) deduction of $3,500 and may also have been allowed a paragraph 60(j) deduction equal to the lessor of his pension income, if any, and the balance of the amount paid. Any amount not deductible under either 8(1)(m)(ii) or 60(j) in 1985 should be accumulated with the carry forward balance under 8(8)(c) noted in the preceding paragraph.

Assuming that the extension of time for the notices of objection is granted, each of 19(12) 1986 to 1989 returns should be reassessed (or assessed as the case may be) to allow the following: 19(1)24(1)

In finalizing your reassessments, 19(1) should be made aware of the following:

     1.   the transfer of periodic pension payments to a pension
          plan will no longer be deductible under the provisions
          of proposed paragraph 60(j) after 1989,

     2.   it is unlikely that he will be entitled to a
          147.2(4)(b) deduction (the pension reform equivalent to
          8(1)(m)(ii) and 8(8)(c) in future years with respect to
          his past service contributions made after 1989 given
          the limit of 2491) minus previous 8(1)(m)(ii)
          deductions, and

     3.   he will in each year be entitled to a 147.2(4)(c)
          deduction (the equivalent to 8(1)(m)(iii) and 8(8)(d)
          in respect of his excess current service contribution
          carry forward equal to the lesser of $3,5000 and the
          aggregate of the excess contributions less amount
          previously deducted under 8(1)(m)(iii) or 147.2(4)(c).

Should you wish to discuss any matters relating to the above please feel free to call Wayne Harding of this office as the number noted above.

for Director Financial Industries Division Rulings Directorate