26 June 1998 External T.I. 9800585 - EARLY RETIREMENT PENALTY REDUCTION

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:

Where an employer pays part of an employee’s retiring allowance to a pension plan to reduce an early retirement penalty, would the reduction of the early retirement penalty be considered benefits related to before 1990?

Position: yes

Reasons:

The pension benefits relate to all years of service which are credited to the member for purposes of the pension benefit entitlements. Consequently, a reduction of the early retirement penalty could be in respect of pre-1990 where such years are credited to the member.

XXXXXXXXXX 						980058
M. P. Sarazin

Attention: XXXXXXXXXX

June 26, 1998

Dear Sirs:

Re: Retiring Allowance and Subsection 8503(15) of the Income Tax Regulations (the “Regulations”)

This is in reply to your letter dated January 12, 1998, wherein you requested our opinion regarding the application of subsection 8503(15) of the Regulations to an early retirement program proposed by one of your clients.

The early retirement program would allow company-terminated members of the company’s registered pension plan, who meet certain qualifications allowing them to retire early, to choose between receiving a severance package plus regular pension benefits or a reduced severance package with enhanced pension benefits. In sacrificing part of the severance package, the employer would contribute part of the severance package to the pension plan in order to fund the provision of the enhanced pension benefits. The enhanced pension benefits would include a flat rate bridge benefit (e.g. $200 per month) that supplements the existing flat rate bridge benefit, payable to the employee until he or she reaches sixty-five years of age and/or unreduced early retirement benefits (i.e. waiver of the existing reduction for early retirement benefits). You question whether the enhanced pension benefits would be considered to apply to benefits provided in respect of a period before 1990 in applying subsection 8503(15) of the Regulations.

Comments

It appears that the opinion you seek relates to specific proposed transactions to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Nevertheless, we can provide you with the following general comments.

Before a pension plan will become a revocable pension plan under the provisions of subsection 8503(15) of the Regulations, the conditions in paragraphs 8503(15)(a) to (c) have to be satisfied. The conditions can be summarized as follows:

(a) a contribution has to made by an employer to a registered pension plan to fund, in whole or in part, benefits provided in respect of a period before 1990;

(b) the contribution has to be made after December 10, 1989; and

(c) it is reasonable to consider that all or substantially all of such portion of the contribution, in respect of the past service benefits, was paid by the employer with the consent of the member in lieu of a payment or other benefit.

The determination of whether all of the conditions are satisfied is a question of fact that can only be determined when all of the facts related to the particular situation are reviewed. However, in our view, the benefits referred to in (a) above are the benefits accrued in respect of the years recognized under the pension plan for a particular member. Consequently, where a member’s pension benefits relate to years of service prior to 1990 then we believe the condition in (a) would be satisfied.

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

Yours truly,

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