ARCHIVED - Superannuation or Pension Benefits
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DATE: January 17, 1992
SUBJECT: INCOME TAX ACT
Superannuation or Pension Benefits
REFERENCE: Subparagraph 56(1)(a)(i) (also sections 57 and 254, subsections 56(4) and 248(1) "superannuation or pension benefit", paragraphs 6(1)(g), 56(1)(x) and (z), and 110(1)(f), subparagraph 56(1)(a)(iii) of the Income Tax Act, and subsection 7800(1) of the Income Tax Regulations)
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This bulletin cancels and replaces Interpretation Bulletin IT-499 dated November 24, 1983. Current revisions are designated by vertical lines.
This bulletin discusses superannuation and pension benefits that are included in income under subparagraph 56(1)(a)(i) and comments on the tax treatment of amounts excluded from the definition of "superannuation or pension benefit". The tax treatment of amounts received from an annuity contract under a pension plan and amounts received from a foreign pension plan are explained. Also dealt with are the taxation of an orphan's benefits, a pension payable to a child of a deceased employee and the division of a retirement pension between spouses under the Canada Pension Plan, as well as a division of pension income on marriage breakdown. Deductions that may be allowed to a surviving spouse or child of a deceased taxpayer for a transfer of benefits received out of a superannuation or pension plan to a registered plan are not discussed in this bulletin. Information regarding these transfers is currently included in the Pension and RRSP Tax Guide which is available at the district taxation offices.
Discussion and interpretation
1. A "superannuation or pension benefit" is defined in subsection 248(1) to include any amount received out of or under a superannuation or pension fund or plan. With certain exceptions (see 3 below), superannuation or pension benefits are included in income under subparagraph 56(1)(a)(i). For this purpose, superannuation or pension benefits include
(a) the amount of any pension, guaranteed income supplement or spouse's allowance under the Old Age Security Act or a similar payment under a law of a province (see 2 below),
(b) the amount of any benefit under the Canada Pension Plan or the Québec Pension Plan, and
(c) the amount of any payment after 1986 under a prescribed provincial pension plan as defined in subsection 7800(1) of the Income Tax Regulations. (Note: The Saskatchewan Pension Plan is the only plan prescribed to date).
Note: Bill C-18 tabled in the House of Commons on May 30, 1991 introduces clause 56(1)(a)(i)(C.1). This clause, if enacted as proposed, would require that payments received by a taxpayer after July 13, 1990 under a foreign retirement arrangement be included in computing income as a superannuation or pension benefit. Bill C-18 will also provide, under subsection 248(1), a definition of "foreign retirement arrangement" as being a "prescribed plan or arrangement". For this purpose, it is intended to prescribe Individual Retirement Accounts (IRAs) referred to in subsection 408(a), (b), and (h) of the United States Internal revenue code.
2. The guaranteed income supplement and spouse's allowance paid under the Old Age Security Act referred to in 1 above, are social assistance payments made on a means, needs or income test under a program provided for by an Act of Parliament and are included in income. However, a deduction in computing taxable income is available under paragraph 110(1)(f) for such payments, which effectively renders them non-taxable. For this reason, they are not currently included or deducted on the income tax return. However, they must be included in the computation of income of a taxpayer, or his or her spouse or dependant, where the amount of the income of such a person is relevant in the determination of the amount of a deduction in computing taxable income or the amount of a tax credit. Some examples of such amounts are the goods and services tax credit and child tax credit or the non-refundable tax credits for married or equivalent status, dependent children and other dependants and the deduction for residents of northern and isolated areas.
3. The exceptions referred to in 1 above are:
(a) amounts received out of or under an employee benefit plan that are included in income under paragraph 6(1)(g) or that would be so included if that paragraph were read without a reference to subparagraph 6(1)(g)(ii) concerning a return of contributions (employee benefit plans are discussed in the current version of IT-502),
(b) amounts included in income under section 57, and
(c) amounts received out of or under a retirement compensation arrangement that are included in income under paragraph 56(1)(x) or (z).
4. Subject to the exceptions noted above, any amount received out of a superannuation or pension fund is income whether it is in the nature of a single payment or otherwise. This is so even if contributions to a particular fund or plan were not deductible for tax purposes. Furthermore, these payments are taxable despite the fact that the particular superannuation or pension fund or plan has not been registered by this Department. However, since unregistered pension plans may come within the definition of "employee benefit plan", payments out of such plans are taxable under subparagraph 56(1)(a)(i) only to the extent that they are not taxed under paragraph 6(1)(g) and do not represent a return of contributions to such a plan as described | in subparagraph 6(1)(g)(ii). (See 9 below.) Where a return of contributions to an employee benefit plan is also a superannuation or pension benefit attributable to services rendered in a period throughout which the employee was not resident in Canada as described in subparagraph 6(1)(g)(iii), such amount is taxable under subparagraph 56(1)(a)(i).
Note: Bill C-18 tabled in the House of Commons on May 30, 1991 introduces subsection 56(8). If enacted into law as proposed, this subsection will allow individuals receiving Canada Pension Plan or Quebec Pension Plan disability pensions to exclude from income in the year of receipt benefits that relate to prior years (except where the prior year benefits are less than $300) and to pay tax on those benefits as if they had been received in the prior year to which they relate. Bill C-18 also introduces section 120.3, which provides for the payment of tax on this basis. This will be applicable for amounts received after 1989.
5. A pension payment which is taxable under subparagraph 56(1)(a)(i) of the Act cannot, either by will or otherwise, be changed into a capital receipt. The full amount received is always classed as a superannuation or pension benefit and not as an annuity payment. Consequently, a deduction is not allowed for what might otherwise be considered to be the capital element of an amount so received. On the other hand, where an employer has a fund or plan separate from a registered employees' superannuation or pension fund or plan, which provides for payments to the widow or a dependant of a deceased employee or former employee, such payments will be classified as death benefits, even if they continue for a long time on a periodic basis or for the lifetime of the recipient. Even if the fund or plan comes within the definition of "employee benefit plan" the payments are not taxed under paragraph 6(1)(g) but are taxable under subparagraph 56(1)(a)(iii) to the extent provided. For a complete discussion on "death benefits" see the current version of IT-301, Death Benefits-Qualifying Payments and IT-508, Death Benefits - Calculation.
6. An amount received out of a superannuation or pension fund or plan will not necessarily be received in cash. For example, a plan might provide that on the death of an employee prior to retirement an amount equal to the employee's contributions under a pension plan, plus interest thereon, is to be paid to the surviving spouse. The surviving spouse may direct that the amount, instead of being received as a lump sum, be paid to an insurance company for the purchase of a paid-up or partially paid-up annuity contract. In this case, the amount paid to the insurance company will be deemed by paragraph 254(b) to have been received by the spouse as a superannuation or pension benefit at the time that payment was made from the pension plan. Payments under the contract will be considered annuity payments with a capital element equal to the applicable portion of the original cost of the annuity that was included in income.
Annuity contracts under pension plans
7. In certain cases, under a superannuation or pension plan, employers maintain annuity contracts in the names of their employees. These contracts may be individual contracts or a group contract in respect of all employees covered by the plan. Some plans provide that, if an employee leaves the employment prior to attaining the retirement age specified in the plan, there will be received from an insurance company either an individual annuity contract or a certificate showing the employee's equity in a group annuity contract. Under paragraph 254(a), an annuity contract issued to an employee in these circumstances does not give rise to income in the employee's hands at the time of issue. Any amount subsequently received by the ex-employee or other person under the contract, however, whether periodically upon maturity of the contract or as a lump sum then or prior to that time, is income when received. The amounts so received are not treated as annuity payments but are included in income either under subparagraph 56(1)(a)(i) as superannuation or pension benefits or under paragraph 6(1)(g) if the plan is an employee benefit plan.
8. A taxpayer who has received an annuity contract under a superannuation or pension plan as described in 7 above may be entitled under the contract to increase the value by paying further premiums into the plan to secure a larger annuity at maturity. For example, the employee's equity in a contract received by the employee on the severance of the employment might be sufficient to produce a life annuity of, say, $10,000 a year at age 65. However, by paying premiums from that time until age 65, there might be acquired the right to a life annuity of, say, $15,000 a year at age 65. Amounts eventually received under this annuity contract would be superannuation or pension benefits (or employee benefit plan payments) to the extent of $10,000 a year and annuity payments to the extent of $5,000 per year. In such a case, the capital element of the $5,000 annuity payment would not be taxable.
Foreign pension plans
9. Foreign superannuation or pension plans normally do not qualify for registration under the Income Tax Act. A pension received by a resident of Canada out of an unregistered foreign superannuation or pension plan is subject to tax in the same way as a pension received from a source in Canada under subparagraph 56(1)(a)(i) unless exempted by the provisions of a tax treaty. However, where a tax treaty does not intervene and the plan also qualifies as an "employee benefit plan" and all or part of the pension is attributable to services rendered in a period during which the recipient was resident in Canada, that portion is brought into income under paragraph 6(1)(g) and excluded under subparagraph 56(1)(a)(i).
10. If certain conditions are met, section 64.1 of the Canada Pension Plan allows a plan contributor to assign a portion of payments under the Canada Pension Plan to a spouse. If a taxpayer's retirement pension under the terms of section 64.1 of the Canada Pension Plan (or a comparable provision under a provincial pension plan or a prescribed provincial pension plan) is divided between the spouses, the amounts received are included in the income of the recipient as a pension benefit under subparagraph 56(1)(a)(i). In these circumstances, subsection 56(4)does not apply to tax the transferor on the transfer of pension benefits to a spouse.
11. If there is a division of pension benefits on a marriage breakdown, generally the pension benefits legislation of a province provides the terms under which a portion of the pension benefits of a member of a pension plan may be paid to a spouse or former spouse under a domestic contract, a written separation agreement, or under a divorce decree or court order under a provincial family law act relating to a division of property on the breakdown of the marriage. Upon a division of pension benefits in these circumstances, the portion received by each spouse or former spouse at a time permitted under the pension benefits legislation of the province is included in the income of that spouse or former spouse as a pension benefit under subparagraph 56(1)(a)(i). The above tax treatment applies even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payments.
Pension payable to child of deceased employee
12. When an employee dies and a pension plan specifically provides for a pension based on the employee's length of service to be paid in respect of a dependent child, that pension belongs to and is income of the child under paragraph 56(1)(a) of the Act. This is so even though it may be paid to a surviving spouse or some other person in their capacity as guardian of the child.
13. An orphan's benefit payable under the Canada Pension Plan or Quebec Pension Plan for a child under 18 years of age is required to be paid to the person or agency having custody and control of the orphan. Despite this requirement, however, the benefit so received on the child's behalf belongs to the child and is income of the child, not that of the actual recipient.
Other interpretation bulletins
14. In addition to the Interpretation Bulletins mentioned herein, the current version of the following Bulletins and Information Circulars may be referred to for a better understanding of the subject:
IT-76 Exempt Portion of Pension When Employee Has Been a Non-Resident
IT-122 United States Social Security Tax and Benefits
IT-222 Advances to Employees
IT-247 Employer's Contribution to Pensioners' Premiums Under Provincial Medical and Hospital Services Plans
IC 72-13 Employees' Pension Plans
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