7 January 2005 Income Tax Severed Letter 2004-0068231I7 - Refundable tax of a retirement compensation arrangement

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.

SUMMARY: Refundable tax of a retirement compensation arrangement—ITA-207.5(1), 207.5(2), 207.7(1), 207.7(2)—Calculation of the refundable tax on, the Part XI.3 tax return for a retirement compensation allowance, for the year following a subsec. 207.5(2) election.

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.

PRINCIPAL ISSUES: Winnipeg Taxation Centre has requested instructions as to how the refundable tax for an RCA is calculated for the year following an election pursuant to subsection 207.5(2) of the Act.

POSITION: Guidance provided.

REASONS: The amount deemed by subsection 207.5(2) as the refundable tax of the arrangement at the end of the year is to be used in the calculation of a balance due or refund (as applicable) performed for the year of the election, as well as the calculations performed the next year after the election.

January 7, 2005

Winnipeg Taxation Centre HEADQUARTERS

Retirement Compensation Unit Income Tax Rulings

Directorate

Attention: Carole Bisson P. Kohnen

2004-006823

Refundable Tax of an RCA

This is in reply to your facsimile of March 24, 2004, requesting our comments on a submission you received from XXXXXXXXXX regarding the calculation of refundable tax on form T3-RCA, the Part XI.3 Tax Return for a retirement compensation arrangement (“RCA”).

Our comments

Subsection 207.5(1) of theIncome Tax Act(the “Act”) defines the refundable tax of an RCA trust at the end of a taxation year. In general, the refundable tax is equal to 50% of all contributions made to the RCA from its inception, plus 50% of the amount, if any, by which its income and capital gains for all years exceeds its losses and capital losses for all years, less 50% of all distributions under the RCA.

By virtue of subsection 207.7(1), which governs the liability for Part XI.3 tax under the Act in respect of an RCA, refundable tax will be payable in years in which the refundable tax at the end of the current year is greater than the refundable tax at the end of the immediately preceding year. Conversely, a refund of Part XI.3 tax in accordance with subsection 207.7(2) will be available when, at the end of the current year, the refundable tax is lower than the refundable tax at the end of the immediately preceding year.

When the subject property of the RCA trust at the end of a taxation year consists only of cash, debt obligations, shares listed on a prescribed stock exchange, or any combination of these properties, the custodian of the RCA may elect, pursuant to subsection 207.5(2) of the Act, such that the refundable tax at the end of the taxation year is deemed for purposes of Part XI.3 of the Act to equal the amount that is the total of: a) the cash at the end of the year, b) the total of each amount that is the greater of the principal amount and the fair market value of each debt obligation at the end of the year, and c) the fair market value of shares at the end of the year.

We would agree with XXXXXXXXXX comment in his letter to you of February 26, 2004 that the previous versions of the T3-RCA return were incorrectly designed such that certain RCAs may have paid refundable tax in years in which their incomes and capital gains exceeded their losses and capital losses, despite having historical net losses and capital losses. The T3-RCA return has been redesigned to rectify this problem. These changes are referred to on pages 3 and 10 of the Draft 2004 RCA Guide (), which is available on the Canada Revenue Agency website.

As is noted above, where a valid election is made by the custodian of a RCA pursuant to subsection 207.5(2) of the Act for a taxation year, the refundable tax is deemed to equal the amount, as described above. Given that a refundable tax balance payable for a particular taxation year, pursuant to subsection 207.7(1), or refundable, pursuant to subsection 207.7(2), will be determined by comparing the refundable tax at the end of that particular year with the refundable tax at the end of the immediately preceding year, in our view, an amount deemed pursuant to an election under subsection 207.5(2) is relevant to the calculations for purposes of subsection 207.7(1) and (2) for the year of the election and for the immediately following year. Accordingly, we disagree with XXXXXXXXXX statement in the first paragraph on page 2 of his letter that “the refundable tax for the end of the immediately preceding taxation year reverts back to the definition of refundable tax as it related to the immediately preceding taxation year. The effects of the election were only in respect of the year in which the election was made.” XXXXXXXXXX seems to be saying that in the year following the election, for purposes of the calculations in subsection 207.7(1) and (2), the refundable tax of the arrangement at the end of the immediately preceding tax year is to be determined using the definition for refundable tax in subsection 207.5(1), rather than the amount deemed pursuant to subsection 207.5(2) of the Act. In our view, the Act does not provide for such a reversion of the refundable tax amount.

In summary, based on our interpretation of the Act and the application of the current version of the T3-RCA to all years, we would disagree with XXXXXXXXXX representation of what he believes should have been filed by his client. Given the data supplied in the submission (note that the income for the XXXXXXXXXX calendar year in the reconciliation chart on page 4 of your facsimile of March 24, 2004 does not agree with the amount shown in the chart on page 18; we have used the data from page 4), and assuming that no other elections pursuant to subsection 207.5(2) of the Act have been made other than as disclosed in the submission, and that no distributions have been paid from the arrangement, in our view, the correct calculations for the respective taxation years for his client would be (all amounts rounded):
• Table 1:
  

  (1)	Yr
  (2)	Contrs.
  (3)	50% of (2)
  (4)	Cumulative Income + Gains from Inception
  (5)	50% of (4)
  (6)	Refundable Tax at Y/E
  (7)	Amount Payable/(Refundable)

XXXXXXXXXX

* The refundable tax amount is due to a subsection 207.5(2) election for this year. As was noted above, we have assumed that no other such elections were made for years after XXXXXXXXXX.

What follows is a comparison of the actual refundable tax payments and refunds received with the refundable tax payments and refunds in accordance with the Act, assuming that the only applicable election under subsection 207.5(2) was in respect of the XXXXXXXXXX taxation year:
• Table 2:
  

  (1)	Yr
  (2)	Refundable Tax Claims Paid/(Refunded)
  (3)	Refundable Tax to be Paid/(Refunded) Pursuant to Act
  (4)	Difference
  (5)	Cumulative Difference

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further assistance.

Roberta Albert, CA

for Director

Financial Industries Division

Income Tax Rulings Directorate