Treasury Board of Canada Secretariat Ottawa, Canada K1A 0R5
Peter K. Noack (613) 995-0051
Attention: Jean C. Martin Chief, Pensions Group
August 6, 1986
Dear Sirs:
This is in reply to your letter of July 17 concerning the tax consequences to the recipient of an ex gratia payment which Treasury Board will be asked to approve.
The payment is proposed to be made to a former public service employee in lieu of pension benefits that he was led to believe he was entitled to receive. The proposed payment of approximately XXXX is based on the total annual pension payments from XXXX to date and the present value of all future pension payments the employee would have been entitled to receive minus the employee's contributions to the Superannuation Account which were refunded in XXXX
You wish to know whether receipt of the proposed payment would be taxable and if so, how. You suggest that a portion of the payment may be included in the income of previous years when no pension income was received or that the payment may be transferred directly to a financial institution for the purpose of buying an annuity. You confirmed in a telephone conversation that ex gratia payments must be made in a lump sum.
It is our view that the payment would be a superannuation or pension benefit as defined in the Income Tax Act. The amount would, therefore, be taxed in the hands of the recipient for the year in which it is paid. Since the amount would not be received out of a registered pension fund or plan, the provisions of paragraph 60(j) of the Income Tax Act would not be available to allow the recipient a "roll over" of all or part of the payment into the recipient's RRSP.
If the amount is used to purchase an annuity for the employee so that the employee becomes the owner of the annuity contract, the employee would have constructively received the whole amount at the time of purchase and the tax consequences would be the same as if a lump sum payment had been received. However, where the former employer purchases an annuity in its name and makes an irrevocable designation of all payments under the annuity contract in favour of the employee, the amount of the purchase price will not be considered to have been received by the employee provided the purchaser remains the owner of the contract. There is no legal basis for attributing pension income received in a year to past or future taxation years.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch