22 June 1999 Internal T.I. 9603687 - INDIAN, RRSPS, T1-OVP

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:

The tax implications of status Indians making RRSP contributions based on tax-exempt income.

Position TAKEN:

1. When payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated.

2. Where an Indian contributes to an RRSP based solely on tax-exempt income, since the definition of “earned income” in subsection 146(1) does not include tax-exempt income, the contributions are not deductible. The Indian would be liable to Part X.1 tax on the "cumulative excess amount", as defined in section 204.2 of the Act, resulting from the contributions, unless this tax is waived pursuant to subsection 204.1(4).

Formerly when a remission order applied to remit a status Indian's taxes otherwise payable on employment income, he or she would technically have had "earned income" and would have been entitled to contribute to an RRSP. In other instances, the amounts in an RRSP relate to amounts transferred from an RPP which in turn related to tax-exempt employment income. Our position in 1 above will exempt payments from an RRSP in both these circumstances, since the contributions would have related to tax-exempt income or income that was accorded tax-exempt treatment by a remission order.

Reasons FOR POSITION TAKEN:

1. Position taken in other files and based on Williams. In Williams, the Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

2. In Mitchell v. Peguis Indian Band ([1990] 2 S.C.R. 85), the Supreme Court described the purpose of section 87 of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians. A contribution to an RRSP cannot be deducted unless there is "earned income" as defined in subsection 146(1). Income that is tax-exempt does not generate "earned income", as it is excluded from income by virtue of paragraph 81(1)(a) of the Act.

		June 22, 1999

	Edmonton Tax Services Office	HEADQUARTERS
	Client Services Division	G. Moore
		952-1506
	Attention: Louise Johnson
		7-960368

RRSPs of Status Indians

This is in reply to your enquiry of July 26, 1995 addressed to Ms. Hélène Beauchemin, former Director General of Client Services Directorate, and forwarded to us for reply. You request clarification on the tax implications of status Indians making RRSP contributions based on tax-exempt income. We apologize for the delay that has been encountered in replying to your request.

Our Comments

The Department's previous position was that payments out of an RRSP were exempt from tax, if they were made from an institution whose head office was located on a reserve. However, in light of the decision of the Supreme Court of Canada in Williams, 92 DTC 6320, this view on the Indian Act tax exemption is not appropriate.

One general direction provided in Williams, was that "an overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse." The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve. The Court also recognized the decision in Mitchell v. Peguis Indian Band ([1990] 2 S.C.R. 85), wherein the Supreme Court described the purpose of section 87 of the Indian Act as being the preservation of the entitlements of Indians to their reserve lands and the prevention of their erosion through taxation, but not the conferring of a general economic benefit upon Indians.

Based on the guidance provided in Williams, the Department reviewed its position on RRSPs. As a result of that review, the Department’s position is that when payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated. This position is the same as the position for RPP benefits reflected in the Indian Act Exemption for Employment Income Guidelines issued in June, 1994.

In our view, income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Income Tax Act (the “Act”) and section 87 of the Indian Act is not to be included in the calculation of “earned income” as defined in subsection 146(1) of the Act. The Income Tax Act is generally specific when the intention is to include income that is exempt pursuant to paragraph 81(1)(a) of the Act in a particular calculation. For example, “earned income” in subsection 63(3) of the Act includes “...all amounts that are included, or would, but for paragraph 81(1)(a), be included...” and the definition of “compensation” in subsection 147.1(1) of the Act includes the phrase “...or that would be required (to be included in the employee’s income) but for paragraph 81(1)(a) as it applies with respect to the Indian Act.” In our view, in the absence of a specific provision which includes paragraph 81(1)(a) exempt income in an income calculation in the Income Tax Act, such income should not be included in the calculation. Accordingly, a contribution to an RRSP cannot be deducted unless there is "earned income" as defined in subsection 146(1) of the Act. Income that is tax-exempt does not generate "earned income", as it is excluded from income by virtue of paragraph 81(1)(a) of the Act. Consequently, where a contribution to an RRSP relates solely to an Indian's tax-exempt income (i.e., the Indian has no "earned income"), the contribution cannot be deducted and any related payment out of the RRSP will be tax-exempt. However, formerly when a remission order applied to remit a status Indian's taxes otherwise payable on employment income, he or she would technically have had "earned income" and would have been entitled to contribute to an RRSP. In other instances, the amounts in an RRSP relate to amounts transferred from an RPP which in turn related to tax-exempt employment income. Our position will exempt payments from an RRSP in these two other circumstances, since the contributions would have related to income that was accorded tax-exempt treatment by a remission order or to tax-exempt income.

Where an Indian contributes to an RRSP based on tax-exempt income, such that the contributions are not deductible (as explained above), in our view, withdrawals from the RRSP would be tax-exempt if related to tax-exempt income but the Indian would be liable to Part X.1 tax on the "cumulative excess amount", as defined in subsection 204.2(1.1) of the Act, resulting from the contributions. Subsection 204.1(2.1) of the Act provides that if, at the end of any month after December 1990, an individual has a “cumulative excess amount” in respect of RRSPs, the individual is required to pay a tax of 1% per month of the “cumulative excess amount”. Pursuant to subsection 204.3(1) of the Act, a Part X.1 return (T1-OVP) is required to be filed with the Department and the tax paid within 90 days after the end of the year in which a cumulative excess amount exists. However, the Minister may waive the tax pursuant to subsection 204.1(4) of the Act, and the late filing penalties and interest may be waived in accordance with subsection 220(3.1) of the Act. The filing of the return (for years after 1991) may be waived under subsection 220(2.1) of the Act. It should determined, on a case-by-case basis, whether the prerequisites for the exercise of these relieving provisions have been met.

If the Part X.1 taxes are waived, paragraph 204.1(4)(b) of the Act requires that the excess be withdrawn from the RRSP. To the extent that the amount withdrawn from the RRSP is related to tax-exempt income, the withdrawal will also be tax-exempt and will not be included in income.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 819 994-2898. The severed copy will be sent to you for delivery to the client.

R. Albert, C.A.

for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Rick Owen
Client Services Directorate
Headquarters, 400 Cumberland 2nd Floor

Diana Jamison
Client Services Division
Victoria Taxation Services Office

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