Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Can a proration of pension benefits based on pre-72 service over total service be used to determine the amount eligible under 40(7) of the ITAR?
Position: No.
Reasons: The provision is very clear and the amount eligible can be no more than the benefit that would have been received had the member left the plan at the end of 1971.
June 8, 2000
WINNIPEG TAX CENTRE HEADQUARTERS
Ian Gray M.P. Sarazin
Director 824-5441
Attention: Pat Romaniuk,
Enquiries & Adjustments Division
2000-002565
ITAR Subsection 40(7)
We are writing to you in response to your facsimile of May 11, 2000, wherein you requested our views as to whether an amount of pre-72 pension contributions plus interest or an amount equal to the commuted value of pension benefits pro-rated for pre-72 and post-71 service periods should be used in determining the limit under subsection 40(7) of the Income Tax Application Rules (the "ITAR").
One purpose of subsection 40(7) of the ITAR is to extend the subparagraph 40(1)(a)(i) averaging provision in respect of lump-sum withdrawals from a pension plan to a restricted amount received out of the particular plan after 1973. The amount eligible under subsection 40(7) of the ITAR is restricted to the lesser of the amount determined under subparagraph 40(1)(a)(i) of the ITAR and the amount that the employee would have received out of the plan had the employee withdrawn from the plan on January 1, 1972, subject to the conditions in paragraphs 40(7)(b) and (c) of the ITAR. Since there are very few current lump-sum payments out of pension plans that would qualify under section 40 of the ITAR, you should review the particular facts related to the payment from the pension plan to determine whether or not the lump-sum withdrawal satisfies subparagraph 40(1)(a)(i) of the ITAR.
Information Circular 74-21R (Payments Out of Pension and Deferred Profit Sharing Plans - ITAR 40) provides the Agency's views in respect of lump sum payments out of a pension plan and describes the calculation of the amount that may still be eligible for the subsection 40(1) of the ITAR averaging provisions. In our view, the use of a formula based on pensionable service to pro-rate the lump sum would not satisfy the conditions described in subsection 40(7) of the ITAR. In order to determine the amount that would qualify under subsection 40(7) of the ITAR, the XXXXXXXXXX would have to determine the amount that the employee would have received out of the plan had the employee withdrawn from the plan on January 1, 1972, subject to the conditions in paragraphs 40(7)(b) and (c) of the ITAR. Note that paragraph 40(5)(b) of the ITAR also places maximums on the payments to an employee that may qualify under subparagraph 40(1)(a)(i) of the ITAR.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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