26 August 2015 External T.I. 2015-0564171E5 F - Paiements d'un RPAC à un Indien -- translation

Principal Issues: 1) Should there be tax withholding on payments, that are not taxable per paragraph 81(1)(a), made to a participant of a PRPP who is an Indian? 2) If so, what documents should the plan administrator request from the participant to justify not withholding tax on such payments?

Position: 1) Yes, exception if a letter of authority is issued to the participant under subsection 153(1.1). 2) A copy of the letter of authority issued by the CRA to the participant per the discretionary power of the Minister.

Reasons: 1) The distribution is first considered a pension benefit, which requires the payor to withhold taxes under paragraph 153(1)(b). Then, the participant considers whether he/she can use the revenue exclusion pursuant to paragraph 81(1)(a). 2) The wording of section 153 and the CRA's administrative position.

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2015-056417

Isabelle Brulotte, CPA, CA

August 26, 2015

Subject: Withholding tax on a payment from exempt income of a PRPP

Dear Madam,

This is in response to your email of January 5, 2015 in which you requested our view on the possibility of reducing income tax source deductions where payment is made to a member of a pooled registered pension plan ( "PRPP"), the participant is an Indian under the Indian Act, and the contributions came from exempt earned income. In addition, you wish to know what documents the PRPP administrator must request from the participant in order to support such reduction in withholding.

Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (the "Act").

Our Comments

This technical interpretation provides general comments on the provisions of the Act and related legislation, where referenced. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

The rules regarding PRPPs are set out in section 147.5 of the Act. Determining whether a distribution from a PRPP is taxable is a question of law and fact. For the purposes of this letter, we assume that in the present situation, distributions are tax exempt by virtue of paragraph 81(1)(a). We also make the assumption that the administrator of the PRPP is also the payor.

A "superannuation or pension benefit," as defined in subsection 248(1), includes a distribution from a PRPP. Every person paying at any time in a taxation year an amount that is a "superannuation or pension benefit" under paragraph 153(1)(b) is required to deduct or withhold tax in accordance with prescribed rules. For the purposes of Part I of the Income Tax Regulations (the "Regulations"), paragraph (b) of the definition of "remuneration" in subsection 100(1) includes a distribution of a PRPP. However, if the distribution derived from a PRPP is not required to be included in computing the participant's income under paragraph 56(1)(z.3), this distribution will be excluded from this definition for source deduction purposes.

Section 147.5 does not include a provision which would ensure that distributions from a PRPP will not be included in computing income under paragraph 56(1)(z.3), where they come within 81(1)(a). Thus, distributions from a PRPP will first be included in the participant's income under paragraph 56(1)(z.3) and they will then be excluded, where applicable, from income when applying paragraph 81(1)(a). Moreover, we are of the view that the fact that paragraph 81(1)(a) would apply to income of an Indian does not release the payor of its responsibilities to deduct or withhold sums as prescribed in respect of that income. Therefore, subject to subsection 153(1.1), we are of the view that tax deductions which are exigible on distributions from a PRPP should be withheld and that the payor under the PRPP is responsible for the appropriate withholding of tax.

Subsection 153(1.1) provides that where the Minister is satisfied that the deducting or withholding of the amount otherwise required to be deducted or withheld under subsection 153(1) would cause undue hardship, a lower amount can be determined. Where a participant determines that distributions from a PRPP received by him or her are exempt from income tax under section 87 of the Indian Act and paragraph 81(1)(a), the individual may choose to request a reduction of the applicable withholding on distributions. To this end, the participant must make a request in writing to the Canada Revenue Agency ("CRA") pursuant to subsection 153(1.1). Generally, the participant must submit Form T1213, Request to Reduce Tax Deductions at Source for the years ___, and submit the completed form to the Taxpayer Services Division of the Tax Services Office with an explanation. However, the participant may choose to send a letter containing all the information required instead of the form. If the request is accepted, the participant will provide the payor with a copy of the letter of authorization from the CRA for the reduction of withholding for the year. The payor must retain the letter of authorization from the CRA to allow the payor to substantiate the elimination or reduction of withholding tax on income paid to the participant so that it can be presented to the CRA in a possible audit.

We trust that our comments will be of assistance.

Eliza Erskine, LL.B.
Director
Business and Employment Income Division
Income Tax Rulings Directorate