6 July 2000 Internal T.I. 2000-0026427 - DIVORCE; ASSIGNMENT OF PENSION

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:

Former spouse of taxpayer ordered to pay taxpayer an amount as equalisation of net family properties. Any amount still owing after the sale of the family home is due in monthly payments of principal plus interest. The court also ordered former spouse to provide a conditional assignment of his pension income in case he defaults on the monthly payments.

Would payments under this assignment be considered taxable pension income of the taxpayer pursuant to paragraph 56(1)(a) of the Act and subject to source deductions pursuant to subsection 153(1) of the Act?

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

The former spouse is not giving up his right to his pension; he is only offering it as security for his debt. The payments, if any, would only be made as part of the division of matrimonial assets, which is capital in nature. Therefore, payments are not taxable income of the taxpayer.

		July 6, 2000

	Toronto East Tax Services Office	HEADQUARTERS
	Business Window	T. Young
		952-1506
	Attention: Cynthia Snea
		2000-002642

Assignment of Pension - XXXXXXXXXX

This is in reply to the letter dated May 10, 2000, from XXXXXXXXXX, your memo of May 24, 2000, and the subsequent letter from XXXXXXXXXX dated June 1, 2000. You have requested our views on whether a court order assigning XXXXXXXXXX a portion of her former spouse's pension income results in her receiving taxable pension income under paragraph 56(1)(a) of the Income Tax Act (the "Act").

In the court order dated XXXXXXXXXX was ordered to pay XXXXXXXXXX $XXXXXXXXXX to equalise the net family assets. According to the letter of May 10, 2000, from XXXXXXXXXX lawyer, in arriving at the $XXXXXXXXXX amount, XXXXXXXXXX pension entitlements were taken into consideration as well as the fact that he would be taxed on 100% of all pension entitlements. Thus, the value of XXXXXXXXXX net share of family assets was discounted for such taxes. The amount of $XXXXXXXXXX is to be reduced by XXXXXXXXXX share of the net proceeds from the sale of the family home with the remainder payable in blended monthly payments of $XXXXXXXXXX principal and interest calculated at the rate of XXXXXXXXXX% per year. The court also ordered XXXXXXXXXX to provide XXXXXXXXXX with a (conditional) assignment of his pension income from the XXXXXXXXXX Pension Plan Board to enable XXXXXXXXXX to obtain payments in the event that XXXXXXXXXX defaults on his payments.

The letter from XXXXXXXXXX lawyer also stated that, in response to concerns from the XXXXXXXXXX Pension Plan Board that the conditional assignment violated the Ontario Pension Benefits Act, an immediate assignment of a portion of the pension payments has been agreed to in principle between XXXXXXXXXX. However, such an assignment would end once the full amount of XXXXXXXXXX payment obligation to XXXXXXXXXX is satisfied.

Our Comments

In our view, neither the court order nor the agreement in principle results in XXXXXXXXXX relinquishing his right to his pension income. Any payments that would be made by the Pension Board to XXXXXXXXXX would be to settle a debt owing by XXXXXXXXXX as a result of the division of matrimonial assets, which is capital in nature. In our view, the assignment is only a security arrangement no different than pledging financial securities against a bank loan. This, in our opinion, should be distinguished from a division of pension benefits as contemplated in paragraph 11 of Interpretation Bulletin IT-499R, Superannuation or Pension Benefits.

Paragraph 56(1)(a) of the Act applies to "any amount received by the taxpayer in the year as, or on account of a superannuation or pension benefit" (underlining for emphasis). It is generally the Canada Customs and Revenue Agency's position that, among other circumstances, an amount is received by the taxpayer at the time when, for example, it was offset against an amount owing by the taxpayer or it was paid or transferred to a third party pursuant to the direction of or with the concurrence of the taxpayer. Accordingly, in our opinion, any portion of XXXXXXXXXX pension that is paid directly to XXXXXXXXXX meets the requirements of paragraph 56(1)(a) of the Act and, therefore, is taxable to XXXXXXXXXX.

Subsection 56(2) of the Act states that any payments made "to some other person (XXXXXXXXXX) for the benefit of a taxpayer (XXXXXXXXXX) ... shall be included in computing the taxpayer's (XXXXXXXXXX) income to the extent that it would be if the payment or transfer had been made to the taxpayer (XXXXXXXXXX)." It is also arguable that subsection 56(2) of the Act also applies to ensure that any portion of XXXXXXXXXX pension that is paid directly to XXXXXXXXXX is taxable to XXXXXXXXXX

In our view, the Pension Board should be required to calculate source deductions from the gross payments to XXXXXXXXXX and include the gross payments on XXXXXXXXXX T4A.

We trust that these comments will be of assistance.

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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