8 September 1994 Internal T.I. 9413897 - FOSTER CARE PAYMENTS RRSP EARNED INCOME

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:Are exempt foster care amounts included in earned income for RRSP and CPP purposes.

Position TAKEN:Not for RRSP purposes. CPP question referred to Source Deductions.

Reasons FOR POSITION: Application of position on other exempt amounts.

			September 8, 1994

	Vancouver District Office	Head Office
D. M. Luciuk	Rulings Directorate
	A/Director	(613) 957-8953
	Attention:  L.E.McLeod
	              Audit Division
			7-941389

Inclusion of Foster Care Amounts in Earned Income

This is in reply to your memorandum of May 27, 1994, concerning the inclusion of foster care payments in earned income for the purposes of Registered Retirement Savings Plan (RRSP) and Canada Pension Plan (CPP) contributions.

The following comments relate to the treatment of these payments for purposes of RRSPs. The issues related to their treatment for CPP purposes have been referred to Mr. Pierre Paquette of Head Office Source Deductions Division, CPP & UI Programs (613-952-5422) for comment.

In your case, a taxpayer operated a personal care home throughout the period 1982 through 1991 and in consequence, received social assistance payments from the Province of Saskatchewan. These payments were reported as business income and the taxpayer made both CPP and RRSP contributions in respect of them in all or some of the years.

Paragraph 81(1)(h) was added to the Act in 1991 with application from 1982, to clarify that, under certain conditions, amounts received as social assistance payments should not be included in income. It is our understanding that these conditions were met by this particular taxpayer and she has accordingly requested a reassessment of tax paid on the amounts reported as business income. In addition, the request has been made in accordance with the Statutes of Canada 1991, c.49, subsec. 61(7) and 1993, c.24, s.159 which provide that, notwithstanding subsection 152(4) to (5) of the Act, if before December 11, 1993, a taxpayer requests the minister to do so, such assessments of tax, amounts deemed to be paid on account of tax, interest and penalties payable or deemed to be paid by the taxpayer for any such year shall be made as are necessary to give effect to the addition of paragraph 81(1)(h) of the Act in respect of the taxpayer. In this case, the taxpayer made the request on August 13, 1993.

It is our position that amounts not included in computing income in accordance with subsection 81(1) of the Act are not included in "earned income" for RRSP purposes as defined in subsection 146(1) of the Act. Accordingly, reassessments may be issued to adjust the deduction of contributions claimed where such amounts were included as business income.

For this purpose we note the following:

The terms of the coming-into-force provisions for section 81(1)(h) (noted above) require the minister to reassess all years back to 1982, if the taxpayer so requests, to give effect to the addition of paragraph 81(1)(h). In our opinion the reduction of earned income and the resultant reduction of RRSP contribution room would, in this case, be effects consequential to the addition of subsection 81(1)(h).

The coming-into-force provisions override the provisions of subsections 152(4) to (5) of the Act. Accordingly, you are not restricted by the three year limitation in assessing prior year returns to the extent such reassessments would otherwise be restricted under those subsections.

Based on the information provided, we were only able to determine estimates of the contributions to an RRSP that could be deducted in each year. However, subject to your confirmation on examination of all information, it would appear that this taxpayer never made contributions to an RRSP that were or would be subject to taxation under Part X.1 of the Act. Accordingly the taxpayer could leave the excess amounts in the RRSP without incurring taxation under that part. Any excess contributions made in 1991 can be left in the RRSP and deducted in future years to the extent possible. Any amounts contributed before 1991 may not be deducted in future years. Any amounts withdrawn from the RRSPs would be subject to taxation at the time of withdrawal.

If reassessments are made to reduce the deduction allowed for RRSP contributions and the excess contributions have not as yet been withdrawn from the RRSP, the taxpayer could use the provisions of 146(8.2) to claim a deduction on the withdrawal of the amounts from the RRSP and thereby receive them tax free. Please refer to page 24 of the 1993 "RRSPs and Other Registered Plans for Retirement Guide" for a discussion of this matter. Please also note that a deduction under subsection 146(8.2) of the Act can be made as a consequence of a reassessment if the excess is withdrawn in the year the notice of (re)assessment is made or the year immediately thereafter.

Please note that Assessing Directive ASG-89-18 is dated May 3, 1989 and pre-dates the addition of subsection 81(1)(h) of the Act.

for Director
Financial Industries Division
Rulings Directorate