23 January 1997 Internal T.I. 9631877 - GARNISHEE OF PENSION BENEFITS

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:

Would pension benefits that are garnisheed under the Family Maintenance Act and the The Pension Benefits Act of Manitoba be taxable and subject to withholding taxes?

Position:

Yes

Reasons:

Payment out of the plan is to member to pay-off his or her liability under the Family Maintenance Act.

			January 23, 1997

WINNIPEG TAX SERVICES OFFICE HEADQUARTERS
J. Purda M.P. Sarazin
Director (613) 957-3499
Attention: Debbie Anderson
963187

Garnishment of Pension Benefit Credits

This is in reply to your memorandum dated September 16, 1996 which was sent to follow-up the status of your letter dated June 20, 1996, wherein you requested our comments with respect to the recent amendments (the "Amendments) to The Garnishment Act and The Pension Benefits Act of Manitoba allowing the garnishment of pension benefits to satisfy an enforceable maintenance obligation. We apologize for our delay in responding which was caused by the fact that we never received your letter dated June 20, 1996.

The Amendments allow a designated officer, a person employed under The Civil Service Act and designated by the Minister of justice for the purposes of enforcement of maintenance orders or agreements under Part VI of The Family Maintenance Act, to issue a Notice of Garnishment on behalf of a person entitled to maintenance under a maintenance order or agreement. The provisions of section 31.1 of The Pension Benefits Act of Manitoba state:

"When a garnishee as defined in section 14.1 of The Garnishment Act is served with a garnishing order obtained under that section to enforce a maintenance order against a member of a pension plan, the member is entitled, for the purpose of satisfying the garnishing order and associated costs and taxes, to receive on the day of service, in complete or partial discharge of the member's rights under the plan, an amount equal to the lesser of

(a)the amount determined by the formula A - B

where

Ais the member's pension benefit credit on that day, and

Bis the total of all amounts each of which is the portion of the member's pension benefit credit to which another person is entitled on a division thereof under subsection 31(2) as of that day; and

(b)the amount determined by the formula C + D + E

where

Cis the amount specified in the garnishing order

Dis the total of all costs allowed by regulation in respect of the garnishing order, and

Eis the total of the taxes, if any, that would be required to be deducted or withheld in respect of a payment of the member's entitlement if the amount of the entitlement were determined under this clause."

Comments

Generally, a pension plan can only make distributions in accordance with the terms of the particular plan which may not include a provision allowing for a payment of an amount under a garnishing order. However, we are of the view that, whether the terms of the particular plan allows for the payment or not, the pension plan would be entitled to make a payment pursuant to the order under the provisions of subsection 147.1(15) of the Income Tax Act (the "Act") because it is required under The Pension Benefits Act of Manitoba.

It is evident that, under The Pension Benefits Act of Manitoba, a member or former member who is subject to an enforceable maintenance obligation is entitled to receive an amount out of the pension plan to satisfy the garnishing order, the associated costs and the taxes. The associated costs include the costs awarded to the garnishee by the Court due to a determination under section 14.2(5) of The Garnishment Act and the administrative costs allowed under paragraph 24.1(4)(c) of the Manitoba Pension Benefits Regulation. The amount under the garnishing order, the associated costs and the taxes will be considered to be a superannuation or pension benefit received by the member or former member and will have to be included in the member or former member's income in the year that the amount is paid out by the pension plan.

Your file was discussed with Carol Johnson (613-952-7388) of the Assessment and Collections Branch. She is of the view that the payment out of the pension plan would be subject to withholding taxes which is consistent with the amendment to The Pension Benefits Act of Manitoba and our general position with respect to garnishing orders relating to other sources of income. If you have additional questions regarding the withholding taxes, you may want to direct them to Carol Johnson at the above noted telephone number.

Under the provisions of subsection 103(4) of the Income Tax Regulations (the "Regulations"), a lump-sum amount paid of $5,000 or less is subject to withholding taxes of 10%, a lump-sum amount in excess of $5,000 and less than or equal to $15,000 is subject to withholding taxes of 20% and a lump-sum amount in excess of $15,000 is subject to withholding taxes of 30%.

In determining the gross amount of the pension benefit paid for reporting purposes and the withholding taxes that have to be remitted under subsection 153(1) of the Act, the amount paid which includes the garnishing order and the associated costs (hereinafter referred to as the "Net Amount") will have to be grossed-up by a specific factor. The following table provides the dividing factor to be used:

								Dividing
	Net Amount						Factor  

	< or = $4,500					.90

	> $4,500 and < or = $12,000		.80

	> $12,000						.70 

The following examples will illustrate the amount to be included in the member or former member's income and the amount of taxes that have to be withheld and remitted by the pension plan.

	Net Amount  	Grossed-up Amount	Withholding Taxes

	$ 4,000	(4,000/.9)  $4,444	      $444
	$ 5,000	(5,000/.8)  $6,250	    $1,250
	$12,000	(12,000/.8) $15,000	    $3,000
	$15,000	(15,000/.7) $21,428	    $6,428

There is no provision in the Act or Regulations that will allow a member or former member to repay these pension benefits paid out on his or her behalf by the pension plan. Consequently, the amount paid by the pension plan will reduce the member or former member's ultimate pension under the pension plan.

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

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c.John O'Meara

Registered Plans Division
Carol Johnson
Assessment and Collections Branch