4 October 2000 External T.I. 2000-0020735 - INDIAN TAXATION-RRSP WITHDRAWALS

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: Taxation of RRSP withdrawals by status Indians

Position: Withdrawals from an RRSP which relate to contributions in respect of income that was exempt from tax, will generally be exempt from income tax. However, withdrawals of investment earnings will be taxed similarly to ordinary investment earnings.

Reasons: Position taken in previous letters.

		2000-002073
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
October 4, 2000

Dear XXXXXXXXXX:

Re: Registered Retirement Savings Plan ("RRSP") held by a Status Indian

We are writing in reply to your letter to XXXXXXXXXX which was received by us on April 17, 2000. You have indicated that you and your wife, XXXXXXXXXX, are each annuitants of an RRSP and you have requested clarification as to whether amounts received by you or your wife out of your RRSP's will be subject to income tax.

Our Comments

A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act"). Income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act does not generate "earned income" for purposes 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.

It is our position that where a status Indian had made contributions to an RRSP out of income that was exempt from income tax pursuant to the Act and the Indian Act, the contributions will not be subject to income tax when withdrawn from the RRSP. However, investment income is generally considered to be earned off reserve and, as such, is taxable to a status Indian upon receipt. Consequently, the withdrawal of any investment earnings related to RRSP contributions out of exempt income by a status Indian will generally be subject to income tax in the annuitant's hands.

To determine which portion of the RRSP withdrawals are subject to income tax, it will be necessary to know the total contributions made to the RRSP with tax-exempt income, the total value of the RRSP and the amount of the withdrawal. A calculation can then be made to determine the part of the withdrawal that is reasonably considered to be in respect of the non-taxable withdrawal of the contributions made with tax-exempt income.

Furthermore, there is a 1% penalty tax which is payable by you on "excess amounts" held by your RRSP at the end of each month. For a status Indian, excess amounts will be calculated on cumulative contributions to an RRSP out of exempt income which have not been withdrawn from the RRSP before the end of a particular month. If steps are taken to remove any excess amounts from your RRSP, the law provides that the Minister of Revenue may waive the penalty tax. Your local Tax Services Office should be contacted by you directly in this regard.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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