30 August 1996 Internal T.I. 9625487 - DEATH BENEFIT PAID IN ERROR

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: Treatment of amount paid in error.

Position:		Outline of options.

Reasons:		General analysis of facts.

			August 30, 1996

Ottawa Tax Services Office Headquarters
Client Assistance Division Wayne Harding
(613) 957-8953
Attention: Sylvain Lessard

7-962548
Amount transferred to an RRSP in error

This is in reply to your facsimile of July 24, 1996, with respect to the erroneous transfer of an amount to an RRSP.

Facts

As we understand the situation, an individual was advised that he was entitled to the payment of a death benefit from his spouse's employer as a consequence of her death. However, the amount was not paid to him. Instead, an amount of $XXXXXXXXXX was transferred directly to his RRSP, presumably, at the direction of the individual. No amount was reported as a death benefit on his personal tax return for 1991.

At some unspecified point in time, the employer determined that the payment was made in error because the individual was not entitled to a payment of a death benefit. The employer then requested a repayment of the amount and on XXXXXXXXXX, the taxpayer made the repayment but with funds held outside of his RRSP.

The RRSP to which the funds were transferred was originally with XXXXXXXXXX. It is presently held by XXXXXXXXXX and has a balance of $XXXXXXXXXX. You advised that the difference between the transfer and the balance represents accrued interest of $XXXXXXXXXX. However we note that the facts provided indicated this was an existing RRSP when the transfer was made. Accordingly, unless the plan was opened to specifically receive the transfer, we suggest that the balance may also include contributions made prior to the transfer.

At the end of 1995 the individual had unused RRSP deduction room of $XXXXXXXXXX carried over from 1992.

Our comments

The following comments are based on the premise that the amount paid was not a death benefit paid under the terms of a registered pension plan (RPP). If you determine that the payment was from an RPP, please refer to the comments at the end of this reply.

1.Treatment of Non-RPP payment

It is our view that no portion of the amount represented a death benefit since the amount was paid in error and not in recognition of the deceased's services to the payor. Therefore, no portion of the amount was taxable to the individual in 1991. Whether the amount is a death benefit or not, there is no provision to allow a deduction on its repayment to the employer in 1994.

There is also no provision in the Act to provide for a transfer of a death benefit to an RRSP on a tax deferred basis nor is there any other provision which would allow a tax free transfer of an amount paid in these circumstances. Accordingly, the amount transferred to the RRSP must be treated as an ordinary contribution to an RRSP deductible under the provisions of subsection 146(5) of the Act to the extent possible and subject to the provisions of Part X.1 of the Act.

Given the above it is our view that tax under Part X.1 is exigible in each year open to reassessment until the excess amount is removed from the RRSP or eliminated through an increase in available RRSP contribution room. 1992 could, however, be reassessed to allow the available unused rrsp deduction of $XXXXXXXXXX. In any event, the interest earned in the RRSP may remain in the RRSP and not be subject to taxation until it is withdrawn from the RRSP.

The individual will eventually be taxable on withdrawal of the excess contributions from the RRSP since it appears subsection 146(8.2) of the Act can not be applied to permit the withdrawal on a tax-free basis. Subsection 146(8.2) can only be applied with respect to withdrawals received:

i.in the year the premiums were paid;

ii.in the year the notice of assessment was issued in respect of the year referred to in i.; and

iii. In the year following the year noted in i. or ii..

Therefore, a deduction for a withdrawal can now only be made if the 1991 tax return is reassessed for some reason in 1996 or some later year. However, in order to reduce the Part X.1 tax applicable, the individual may still wish to withdraw the amount from the RRSP on a tax paid basis. In this case you could waive the part X.1 tax in accordance with the provisions of subsection 204.1(4) of the Act should you wish.

2. Treatment of the amount as a transfer from an RPP

If it is found that the amount was actually paid from an RPP and was ultimately repaid to the RPP, we would suggest that the same treatment described above could be applied to the extent the amount is treated as not being a proper RPP benefit but merely as an amount paid in error. Otherwise the provisions of subsection 147.3(7) of the Act would seem to be applicable to the initial payment. In this case the transfer to the RRSP would be tax-free but the repayment would not be deductible and the amount would be subject to taxation when it is withdrawn from the RRSP. The amount would however not be subject to any Part X.1 taxation.

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