8 February 2000 Internal T.I. 1999-0007277 - PENSION INCOME ON MARRIAGE BREAKDOWN

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: Whether the payment of pension benefits pursuant to a marriage breakdown is taxable to the wife as pension income

Position: Yes, pursuant to the divorce agreement the husband assigned to the wife one-half of gross pension accumulated during the marriage and the wife is being paid directly out of the pension by the pension plan administrator

Reasons: The husband and wife are each taxed on their share of the pension income received pursuant to 56(1)(a)(i) based on the terms of the divorce agreement.

			February 8, 2000

	OTTAWA TSO	HEADQUARTERS
			Mary Pat Baldwin
	Attention:  Ms. Nicole Coté	957-2087

			1999-000727

Ownership rights to pension income on marriage breakdown

This is reply to your memorandum of October 20, 1999 and your facsimile of November 5, 1999 regarding the taxation of pension income as result of the marriage breakdown of XXXXXXXXXX (the "Husband") and XXXXXXXXXX (the "Wife"). You were also enquiring on the deduction of the pension payments paid by Husband to Wife.

We have reviewed the information sent to us and must note that only a portion of the divorce agreement was provided and that the divorce agreement contains contradictory statements concerning the split of pension and the divorce court's characterization of pension income as "support" for certain provincial statutory purposes. We thus caution that our conclusions below must be read in light of these limitations.

It appears that pursuant to the divorce agreement the Wife is entitled to receive a one-half interest in the Husband's pension accumulated during the years of married cohabitation. The Husband further directed the administrators of the plan to make the payments that were determined under the agreement directly to the Wife if they were able to do so. In your submission to us there was a letter attached from what appears to be the pension plan administrator that indicates that both Husband and Wife are being paid directly from the pension plan an amount that was calculated pursuant to the divorce agreement.

Our position with respect to pension payments is noted in paragraph 11 of Interpretation Bulletin IT-499R which states:

"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 treatment applies even if the administrator of the pension plan issues one cheque to the plan member who is required to apportion the payments."

In the recent court case of Carol Ann Walker vs The Queen (an unreported decision of the FCA, November 16, 1999) the Court affirmed a Tax Court decision where the husband and former spouse divided the pension payments of the husband. In this case the husband and former spouse divided the pension and when the husband was to start receiving his pension payments, the former spouse was to receive one half of the gross proceeds of his pension. The problem was that the pension administrator could not issue two cheques but instead issued one cheque and the husband then wrote a cheque to the former spouse for one-half of the gross pension. The Court noted:

"The separation agreement here clearly calls for the husband to assign one half of the gross proceeds of his pension income from his military service. The Tax Court Judge characterizes this as the last act by the parties in 'equalizing the net family properties' under the FLA. If the assignment had been processed at source by the military authorities, as contemplated in the separation agreement, two separate cheques would have been issued. Each party would then have reported annual income from this source in the amount of $5,021.00. ... We believe it was the intention of the parties at the time the separation agreement was executed that each would pay income tax on the gross amount received with the result that each would be left with their share of the pension (the property in this case) after taxes."

Even though the divorce agreement indicates a contradictory intention of the parties to both split the pension income and for the amount paid out of the pension to the Wife to be considered support to the Wife and thus deductible to the Husband, we believe the better view is that the Husband has assigned to the Wife one-half of his gross pension accumulated during the years of married cohabitation, resulting in Husband and Wife each having pension income included in income pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act equal to the amount distributed to each from the pension plan.

We have based our above opinion on the limited information supplied to us and on the basis that the provincial legislation allows the pension asset to be divided.

We trust that the above comments will be of assistance to you.

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate