Principal Issues: Whether "qualified pension income" as defined under subsection 118(7) of the Act would include payments in respect of a life annuity out of a LRIF or LIF where the locked-in account is funded with amounts transferred from a RPP and the recipient is under 65 years of age.
Position: No
Reasons: Where a recipient is under 65 years of age and is not receiving the amount as a consequence of the death of their spouse or common-law partner, the payment in respect of an annuity from the locked-in account is not considered "qualified pension income".
Question 4 - Pension Splitting - Locked-In RIF
Background
Availability of the pension credit under subsection 118(3) and pension income-splitting under section 60.03 depends, inter alia, upon an individual receiving "pension income", "eligible pension income" and "qualified pension income" as defined in subsection 118(7).
"Pension income" is defined to include income received by an individual and included in computing the individual's income for the year and includes, among other things, a payment in respect of a life annuity out of or under a superannuation or pension plan, as well as an annuity payment under a registered retirement savings plan or a payment out of or under a registered retirement income fund. It also includes a payment payable on a periodic basis under a money purchase provision of a registered pension plan.
"Eligible pension income" is defined as the pension income received by an individual in the taxation year if the individual has attained the age of 65 before the end of that year, but is limited to the individual's "qualified pension income" received by the individual for the taxation year where the individual has not attained the age of 65 before the end of the taxation year.
"Qualified pension income" is income received by an individual in a taxation year which is an amount included in computing the individual's income for the year that is a payment in respect of a life annuity out of or under a superannuation or pension plan, but only includes a payment under an RRSP annuity or out of or under a RRIF to an individual as a consequence of the death of a spouse or common law partner of the individual.
In order to be eligible for the pension credit and for pension income-splitting, the individual must receive eligible pension income.
The question arises whether payments in respect of a life annuity out of or under a superannuation or pension plan (and thus payments that are eligible for the pension credit and pension income-splitting before the individual attains the age of 65) would include payments out of or under a locked-in RIF (LRIF) or Life Income Fund (LIF) which in turn is wholly funded through a transfer of pension entitlement from a registered pension plan.
Question
Given the requirements imposed on LRIFs and LIFs, where payments are structured in a manner similar to a life annuity, and the funds are derived exclusively from a transfer of funds from a registered pension plan and the locking-in requirements are governed under applicable pension legislation, CALU is of the view that such payments should be considered payments in respect of a life annuity out of or under a superannuation or pension plan.
Would the CRA permit such a payment to an individual to be viewed as qualified pension income for purposes of the pension credit and pension income-splitting before the individual attains age 65?
CRA Response
We disagree with the proposition that a payment from a LRIF or LIF constitutes a payment in respect of a life annuity under a superannuation or pension plan.
The terms LRIF and LIF are not defined in the Income Tax Act and these locked-in accounts are treated simply as a RRIF for the purposes of the Act. It is the CRA's long-standing position that a RRIF is not a superannuation or pension plan, and amounts transferred into a RRIF from a pension plan (or indirectly via an RRSP) do not retain their identity as pension income when paid out of the RRIF.
We are also of the view that the stream of income payable from a LRIF or LIF would not be considered a life annuity, as the annual payments are determined each and every year by reference to the current fair market value of the property of the LRIF or LIF, and the annuitant has discretion to select the total payments to be made each year within the range permitted by the applicable income tax and pension rules.
K. Podor
2014-052331
May 6, 2014