Section 60 - Capital element of annuity payments

Example given of calculation of deduction under s. 60(a) for the capital portion of a life annuity.

Alimony or maintenance payments that are now paid to a public trustee because the former spouse has been placed in a mental institution will continue to be deductible to the payer because under the relevant legislation (the Mental Health Act (Manitoba)), the public trustee will receive the payments on behalf of the former spouse.

An amount paid does not necessarily have to be paid periodically to be deductible as long as the allowance provided for in the order or agreement is an allowance payable on a periodic basis. Consequently, RC generally takes the position that lump-sum payments made on account of amounts that were payable on a periodic basis pursuant to a court order, but that have fallen into arrears, will be deductible.

Where a spouse transfers an interest in the principal residence to the other in satisfaction of alimony payments that are in arrears, no deduction generally will be available under s. 60(b) for the transfer.

An agreement entered into before or after marriage but before separation which sets out mutual rights and obligations that would arise following separation, does not qualify as a written separation agreement.

Where one spouse pays the insurance premiums on insurance coverage acquired in order to ensure that alimony payments are made in the event of his sickness or disability, the doctrine of constructive receipt will apply to deem any benefit under the policy to have been received by him and then paid to the recipient spouse. Consequently, the payor of the premiums will be permitted to deduct the payment as alimony, and the recipient will include the payments in income.

Where the taxpayer had purchased an annuity contract and irrevocably directed that the annuity payments be made to his former wife, who has no right to the capital element, the income element of each annuity payment will be included in the taxpayer's income, and he will be permitted to deduct each annuity payment under s. 60(b).

Payments by the estate of a deceased taxpayer of alimony payments that were in arrears would not be deductible under ss.60(b) or (c).

A paternity agreement that has been incorporated into a court order of the Provincial Court would constitute an "order" as envisioned by s. 60(c.1), but not a paternity agreement filed with the Provincial Court pursuant to s. 35 of the Family Law Act.

Employer accidentally missed contributing, to a group RRSP or defined contribution pension plan, the Employer's portion on behalf of an employee for a time period, and will now make a restorative payment to the accounts of the employee under the Plans to compensate for the lost income from the missing contributions. Does a taxable benefit result? CRA responded:

Where a payment made by an employer into a registered plan of an annuitant is reasonable compensation for an employee's financial loss and the payment is the result of a wrongdoing or tort in the administration of the plan…the payment would not be viewed as employment income to the employee. …[N]either the employer nor the employee are considered to have made a contribution or paid a premium to the registered plan as a consequence of the payment of damages and therefore, there is no corresponding deduction available under paragraph 20(1)(q) or paragraph 60(i).

The Individual will be entitled to a deduction under paragraph 60(j)… for the contribution to his RRSP… .

See summary under s. 126(1).

The taxpayer wishes to transfer funds from a personal pension scheme (PPS) in the United Kingdom, which is a self-funded retirement plan, to a registered retirement savings plan (RRSP).

A s. 60(j)(i) transfer is not available as the PPS is not a superannuation or pension plan given the CRA policy that such a plan is one to which "contributions have been made to the plan by or on behalf of an employer of an employee in consideration for services rendered by the employee and the contributions are used to provide the employee with an annuity or a pension on or after the employee's retirement," whereas here only the taxpayer had made contributions.

A s. 60(j)(ii) transfer is not available, as to date only IRAs have been prescribed under Reg. 6803.

After accruing benefits in a UK define plan while residing and being employed in the UK, the correspondent received a lump-sum payment from the plan "(which is not a part of the series of periodic pension payments and would represent a partial commutation of pension benefits) as well as a monthly payment which comes due on the individual's XXXX birthday."

After providing a summary of the parts of IT-528 relevant to the taxpayer's situation, CRA indicated that the taxpayer would probably be entitled to a s. 60(1)(j) deduction in respect of the lump-sum payment from the UK pension plan, provided that the contribution were made to the taxpayer's RRSP in the year the benefit is received (or within 60 days of year's end).

Where members of a registered pension plan direct their employer to transfer their retiring allowance to the RPP to purchase past service benefits and the amount eligible for deduction under s. 60(j.1) exceeds the past service benefits permitted to be purchased, the difference may be transferred to an RCA to provide benefits in excess of the benefits from the RPP. The Directorate stated:

Subject to certain conditions, the taxpayer may claim a deduction under paragraph 60(j.1) for the eligible amount of a retiring allowance transferred to the taxpayer's RPP or registered retirement savings plan. There is no provision in the Act that allows for a deduction for a retiring allowance transferred to an RCA.

Generally, there is no loss of employment on a school board amalgamation. Therefore, years of service with a predecessor board may be included in calculating the amount under s. 60(j.1).

"In the circumstances where either subparagraph 60(j.1)(iv) or (v) of the Act apply, namely where the partnership has acquired or continued a corporation's business or where the partnership's pension plan would provide benefits based on the employee's former service with a corporation, the Department will accept that that corporation is a 'person related to the employer' (i.e., the partnership) for the purposes of paragraph 60(j.1) of the Act."

S.60(j.1)(v) would apply to deem a new employer to be a related employer where the new employer has a money purchase registered pension plan, the old employer has a defined benefit registered pension plan and the employee commutes his pension with the old employer and transfers the commuted value of his pension benefits to the money purchase registered pension plan of the new employer. However, s. 60(j.1) will not apply where the new employer waives the vesting period under the registered pension plan. "The waiving of the vesting period only allows the employee to receive full entitlement to pension benefits earlier and in no way increases the amount of pension benefits to take into account years of service with the former employee, that the employee receives upon retirement."

"If any part of the service with a previous employer is recognized under the current employer's pension plan, all the years of service with the former employer will be considered service with a 'person related to the employer'."

Where termination pay is paid to an employee in lieu of the wages that would have been payable to an individual for the notice period set out in s. 57 of the Employment Standards Act (Ontario), the notice period will be included in the length of the employee's employment for purposes of the computation under s. 60(j.1)(ii)(A).

The years in which an employee was employed by a foreign subsidiary can be taken into account.

"The 'employer' of the New Brunswick Legislative Assembly is the same employer of the New Brunswick Civil Servants and, therefore, all years of service as an MLA and a provincial civil servant may be aggregated."

Where an individual works for Employer 1 when it is related to Employer 2, Employer 2 severs its connection with Employer 1 so that it no longer is related, and the individual quits his job with Employer 1 and obtains employment with Employer 2, the eligible amount of a retiring allowance paid by Employer 2 cannot include amounts in respect of years of employment with Employer 1 because Employer 2 was not related to Employer 1 either at the time the retiring allowance was paid or at the time the employee terminated the first employment and obtained the second employment.

Routine discussion includes an example.

The years of service used in the calculation of a portion of a retiring allowance that may be transferred to an RRSP under s. 60(j.1) need not be continuous.

Another school board will be considered to be a person related to the school board currently employing the taxpayer where both boards participate in the Ontario Municipal Employees' Retirement System.

The number of years of service need not be continuous in order to be included in the calculation of the amount deductible.

A taxpayer may elect under s. 60(j.1) to transfer a retiring allowance to his registered pension plan in order to buy back past service for years prior to 1990, while he was not a contributor, provided that the terms of the pension plan permit him to do so.

Where an employee pays amounts into a pension plan to buy back past service years, the employer's contributions have vested in respect of each year bought back even though the employee paid the employer's required contributions for those years.

Where an employee buys back years of service under a pension plan and pays the employer's shares of contributions in addition to his share, the years involved are still considered to be years in which the employer made contributions to the plan.

Re effect of winding-up of pension plan on test in s. 60(j.1)(v).

Where, under a pension plan, an individual who suffered a loss of office could elect, with respect to one or more years of service prior to 1987, to receive out of the plan only his own contributions plus the related earnings, in which case the vesting of the employer's contributions were forfeited for that year, the individual could take advantage of s. 60(j.1)(ii)(B) for each of the years for which such an election is made.

Because a "pension plan" includes any pension plan whether registered or not, an employee of a Canadian corporation who is covered by a foreign-based pension plan of its U.S. parent and receives a "retiring allowance", is entitled to transfer to an RRSP only $2,000 for each year of employment for which the employer has made contributions which have vested.

Discussion of years credited for employment with a previous employer of the retiree.

Can a deceased RRSP annuitant's financially dependent child or grandchild who was not dependent on the deceased by reason of physical or mental infirmity claim a deduction under s. 60(l) for the amount of a refund of premiums under an RRSP that is included in the child's or grandchild's income in the year and transferred in the year to a pooled registered pension plan ("PRPP") or specified pension plan ("SPP"). CRA stated:

Clause 60(1)(v)(B.1)… limits the amount that may be deducted by a deceased RRSP annuitant's financially dependent child or grandchild who was not dependent on the deceased by reason of physical or mental infirmity to the amount of a refund of premiums under an RRSP that was transferred to an annuity for a fixed term not exceeding 18 years minus the child's or grandchild's age in whole years at the time the annuity is acquired. Consequently, a deduction is not available under paragraph 60(l)… when a non-infirm financially dependent child or grandchild transfers a refund of premiums to an account under a PRPP or an SPP.

Where a taxpayer dies intestate, then provided the property of the deceased is distributed to the beneficiaries in accordance with the shares specified in the applicable provincial law of intestacy, such property will be considered to have been distributed as a consequence of the deceased's death per s. 248(8) even if each type of property is not distributed on a pro rata basis among the beneficiaries. For example, it would be permissible for a surviving spouse to receive, in accordance with such provincial law, all of an RRSP of the deceased that was included in the estate, in order to access the s. 60(l) rollover.

"Where an individual is the annuitant of several registered retirement savings plans ("RRSPs") and the individual is both married and living common law as described in paragraph 252(4)(a) of the Act then... the married spouse could be named as the designated beneficiary of some of the RRSPs and the common-law spouse could be named as the designated beneficiary of the remainder of the RRSPs."

This was a follow-up query on 2012-0437831E5, indicating that voluntary disclosure costs were not deductible, as they were neither incurred to earn income from business or property, nor in relation to an objection or appeal. After confirming this position, CRA stated:

However, where a taxpayer earns income from a business, the cost of making a voluntary disclosure relating to that business may be deductible as a cost of representation pursuant to paragraph 20(1)(cc).

Are legal or accounting expenses incurred respecting a voluntary disclosure deductible? After indicating that the deduction of such expenses generally would be restricted by s. 18(1)(a), CRA stated (TaxInterpretations translation):

[P]aragraph 60(o) becomes applicable…from the moment that the situation qualifies as an objection or appeal… . [A] taxpayer can deduct professional fees from the moment when he or she is informed by the CRA that his or her income or tax for a taxation year will be revised.

...Consequently, the professional fees which are deductible by virtue of paragraph 60(o) must be claimed in the year when they are payable.

See summary under s. 18(1)(a) – legal fees.

The taxpayer unsuccessfully appealed the disallowance of medical expense tax credits to the Tax Court. CRA stated:

the amounts deductible under subparagraph 60(o)(i) would generally include the legal fees paid by the appellant to his own legal representative as well as those legal fees required to be paid by the appellant to the respondent's legal representative as a consequence of costs being awarded by the TCC to the respondent.

The taxpayer incurred fees in making representations after being informed that amounts were owing for unpaid income taxes, sales tax and GST (perhaps by an insolvent corporation of which he was a shareholder). No assessment was issued.

In finding that the fees were not deductible under s. 60(o), CRA stated (TaxInterpretations translation):

...paragraph 60(o) cannot appply in cases respecting sales taxes. That was the CRA position in Interpretation 2004-0101351I7.

...paragraph 60(o) applies to expenses incurred in the course of negotiations with auditors from the time that the taxpayer was infomed that he was the subject of an audit review....

"[A]ny legal or accounting fees or expenses relating to the filing of a voluntary disclosure are not deductible by the taxpayer under subsection 60(o) of the Act as they do not relate to an objection or an appeal."

Legal and accounting fees respecting a voluntary disclosure are not deductible under s. 60(o). Where a taxpayer had informed the Department that excessive RRSP contributions had been made, only legal and accounting fees incurred after that date would be deductible under s. 60(o).

The administrator of a defined benefit pension plan is seeking the authorization of the Office of the Superintendent of Financial Institutions ("OSFI") to amend the plan so as reduce benefits. Are legal expenses paid by the beneficiaries to make representation to OSFI in resisting this proposal deductible under s. 60(o.1)? CRA responded (TaxInterpretations translation):

[T]he judicial and extrajudicial expenses paid [here] by a taxpayer to make representations to OSFI are generally expenses incurred to establish a right to a benefit under a pension fund or plan contemplated by paragraph 60(o.1). To the extent that the limits stipulated in paragraph 60(o.1) are satisfied, a taxpayer can deduct these expenses.

Regarding a taxpayer's lawsuit for reinstatement of employment and associated retroactive pay, and to receive performance pay and other damages, CRA stated that the taxpayer's legal fees should be apportioned reasonably among the various objectives of the taxpayer's suit, and the deductibility of each portion should be considered based on its corresponding objective and on its success:

• The portion relating to unpaid performance pay, which allegedly accrued during the taxpayer's employment, is deductible under s. 8(1)(b) regardless of the suit's outcome, in accordance with Loo.
• The portions relating to reinstatement of employment and associated retroactive pay, banked leave, and lost promotional opportunities are not currently deductible (CRA stated that Turner-Lienaux establishes in general that a person is not "owed" salary or wages if he did not do the work or occupy the position that required the salary or wages to be paid). However, such portions may become deductible depending on the outcome:
  • If the taxpayer's suit is successful and the taxpayer is reinstated, then these portions relate to salary or wages owing and are deductible under s. 8(1)(b) (Fernando).
  • If the taxpayer's suit is successful in the main but the taxpayer is not reinstated, then these portions will fall under the s. 248(1) definition of "retiring allowance" and will be deductible under s. 60(o.1) to the extent of the amount received and included in income (e.g. not counting RPP and RRSP contributions).
  • If the taxpayer's suit is unsuccessful, then these portions cannot be said to be owing, and are not deductible.
• The portion relating to pain and suffering awards, if any, are not deductible because damages for pain and suffering are non-taxable.

There is no requirement that an individual contributing to an FRA be a non-resident in order for the amount to qualify as an eligible amount.

Any amount transferred from a foreign pension plan to an FRA is considered to be an employee contribution to the FRA and it would qualify as an eligible amount. This would also be the case in respect of employer contributions. "However, we have previously opined that where the purpose of the transfer from the pension plan to an FRA is to circumvent the application of subparagraph 60(j)(i) of the Act then we would consider the application of subsection 245(2) of the Act."

Amounts paid out of an SEP IRA or a 401(k) pension plan would be considered payments out of a pension plan for purposes of the Act.

Fees paid to a party other than a firm of barristers and solicitors could qualify as legal expenses if they can be regarded as being for services pertaining to the domain of law.

Legal expenses incurred to buy back pensionable years or to adhere to a pension plan are not deductible.