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:
follow-up to our file CCM File 7-993326, (CS-CIMS Folder 4537, ID 1999-001524)
1. Can funds be transferred between RCAs as a consequence of a marriage breakdown?
2. Can an employee contribution to an RCA be treated as a refundable overpayment of taxes if it is not deductible under paragraph 8(1)(m.2)?
Position:
1. Yes but the consequences may not be as expected.
2. No.
Reasons:
1. The taxability of the amounts to the employee may continue under the provisions of the Act.
2. Non-deductibility of the contributions will not result in an overpayment of any taxes.
March 22, 2000
HEADQUARTERS HEADQUARTERS
Peter Pustay W.C. Harding
A/Manager, Policy & Technical Services 957-8953
Trust Accounts Division
Attention: Lloyd MacKay
2000-001003
Retirement Compensation Arrangements ("RCAs")
This is in reply to your memorandum of February 23, 2000, in which you asked us to respond to comments received by you with respect to our memorandum to you dated January 17, 2000, (our file 1999-001524). In that memorandum we provided opinions on two situations and these are summarized below together with our comments with respect to the new submissions.
Situation 1
In this situation a taxpayer is a member of his employer's RCA. The taxpayer's former spouse is the shareholder of a wholly-owned holding corporation. You were originally asked if the taxpayer's former spouse could cause the holding company to create an RCA for her benefit and have an amount transferred from the husband's RCA to her RCA pursuant to a marriage breakdown agreement with the transfer subject to the provisions of subsection 207.6(7) of the Income Tax Act (the "Act").
We replied that consideration should first be given (for reasons not repeated here) to the ability of the former spouse to have an RCA established by a holding company and also to the combined effects of paragraphs 56(1)(x) and (z) and subsection 70(2) of the Act as they may apply in such a situation. We then stated with respect to the application of subsection 207.6(7) of the Act that we are of the opinion that the provision could apply to such a transfer but that, paragraph (a) of the provision states "the amount [transferred] shall not solely because of the transfer (underline added), be included in computing a taxpayer's income under Part I [of the Act]". Accordingly, it was our opinion, this provision could permit the inclusion of the amount of the transfer in a taxpayer's income on the basis of factors other than the transfer if it is appropriate in the circumstances to do so. For example, it may be found that an amount is being transferred as consideration for a disposition of some property. If this is the case it might be appropriate to include all or a portion of the amount in the vendor's income. We concluded by noting, a decision of this nature would depend on a complete understanding of the facts relevant to the particular situation.
You have now received further questions on the application of the law if, as a result of the marriage breakdown the parties, agree to change the beneficiary under the existing RCA to the former spouse.
We again refer you to the provisions of paragraphs 56(1)(x) and (z) of the Act as well as paragraph 56(1)(y) of the Act. In general, these provisions are intended to insure that amounts received out of an RCA are first included in the income of the employee who provided the employment services in respect of which the RCA was funded. They will generally only apply to tax the amounts in the former spouse's income after the death of the employee. Paragraph 56(1)(y) applies to include any proceeds received from the disposition of an interest in an RCA by a taxpayer. Accordingly this paragraph may apply where the beneficiary under an RCA is changed.
Situation 2
In this situation an accounting firm outlined a proposal to establish two RCAs for two shareholder/employees of a corporation and asked you to confirm that if the employee contributions are not deductible under paragraph 8(1)(m.2) of the Act that:
1. the custodian would receive a full refund of the amounts remitted as employee contributions pursuant to subparagraphs 164(1)(a) and (b) of the Act as an overpayment of tax [i.e. not as refundable tax pursuant to paragraph 207.7(2) of the Act]; and
2. interest would be paid on the overpayment refund, as provided under subsection 207.7(4) and subparagraph 164(3)(d) of the Act.
In this case we indicated that it was likely more appropriate in the circumstances of the request for the firm to seek an advance income tax ruling should they need confirmation of the deductibility of any contributions to the RCAs. We also indicated that in our opinion, the provisions would not apply to the situation if the plan as structured established a bone fide RCA because there would not be any overpayment of taxes on the contributions.
The firm has again submitted their request for confirmation that the above provisions will apply with support taken from commentary published by the Carswell Tax Partner Service.
The published commentary referred to above, indicates that subsection 207.7(2) of the Act provides the mechanism for the refunding of Part XI.3 tax while section 164 of the Act provides a mechanism for the refund of overpayments of the refundable tax. We agree with the statements made in this publication. However, it remains that section 164 of the Act can only apply where there is in fact an overpayment of the tax as may occur, for example, if too much tax is withheld by an employer or custodian in respect of an employee contribution to an RCA.
In their submissions the accounting firm takes the position that an overpayment of tax (to which section 164 of the Act applies) will arise where an employee contribution to an RCA is repaid to the employee because the amount cannot be deducted by the employee under paragraph 8(1)(m.3) of the Act. We do not agree with this position. Where a contribution is made to a bone fide RCA, tax must be withheld in accordance with the Act whether or not the amount of the contribution is deductible under paragraph 8(1)(m.3) of the Act. An overpayment of tax will not result solely because the amount of the contribution is not deductible under paragraph 8(1)(m.3) of the Act. Furthermore, the fact that a plan provides for the repayment of contributions to the employee in the event they are not deductible by the employee only results in a distribution of benefits out of the RCA which may, in turn, result in a refund of Part XI.3 tax subject to subsection 207.7(2) of the Act. A return of contributions does not cause the tax originally withheld and remitted to be an overpayment of tax.
Please note that our opinion letter (file 9919325) referred to by the firm in their submission provides an explanation of when amounts contributed to an RCA by an employee are deductible by the employee under the provisions of paragraph 8(1)(m.3) of the Act. It does not address the above situation nor does it provide any comments on a provision of an RCA which allows the return of contributions that are not deductible under the Act.
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 613 957-0682. The severed copy will be sent to you for delivery to the client.
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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