12 February 2002 External T.I. 2001-0115285 - WITHHOLDING TAX FOR DEREGISTRATION

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: taxpayer has filed an assignment for bankruptcy and the bankruptcy trustee has requested that all the assets are to be deregistered. The plan's trustee states that there are not enough funds available in the plan to pay all of the withholding tax required for deregistration and that the only other asset in the plan is a debenture bond that is not cashable or saleable.

Position: taxpayer, the trust company and the trustee in bankruptcy are jointly and severally liable for amounts required to be withheld and other amounts payable, such as penalties and interest, if the payer (the trustee of the Registered Retirement Savings Plan (RRSP) or RRSP administrator or operator as the case may be) fails to withhold.

Reasons: As per subsections 227(5) and (5.1) and prior opinion.

XXXXXXXXXX 2001-011528
Cornelis Rystenbil, CGA
February 12, 2002

Dear XXXXXXXXXX:

Re: Withholding tax for deregistration

This is in reply to your electronic message of November 30, 2001 in which you ask our opinion on a situation where one of your clients has filed an assignment for bankruptcy and the bankruptcy trustee has requested that all the assets are to be deregistered. You have indicated that there are not enough funds available in the plan to pay all of the withholding tax required for deregistration and that the only other asset in the plan is a debenture bond that is not cashable or saleable.

Our comments

Paragraph 153(1)(l) of the Income Tax Act (the "Act") requires a person paying an amount out of or under an Registered Retirement Savings Plan (RRSP) to withhold a prescribed amount of taxes under Part I of the Act. Section 101 of the Income Tax Regulations (the "Regulations") requires that every person making a payment described in subsection 153(1) of the Act deduct or withhold such amount, if any, as is determined under Part I of the Regulations. A payment includes a distribution of property and equals the fair market value of the property. The fair market value of a debenture bond that is not cashable or saleable is a question of fact. Subsection 103(4) of the Regulations contains the provisions for withholding on "lump sum payments" which are defined in subsection 103(6) of the Regulations (this definition would include a lump sum amount received upon deregistration of an RRSP). Prescribed withholdings are required to be made by the "employer," defined in subsection 100(1) of the Regulations - for purposes of Part I of the Regulations as well as Schedule I - to be any person paying remuneration (paragraph (i) of the definition of "remuneration" states that remuneration includes certain payments out of an RRSP). Therefore, the trustee of an RRSP (or plan administrator or operator as the case may be) is normally required to make income tax deductions from a distribution out of the RRSP.

Upon the transfer of title of a bankrupt's RRSP to a trustee under the Bankruptcy Act, the trustee in bankruptcy is empowered to exercise powers in or over or in respect of the plan (including its deregistration) as might have been exercised by the bankrupt for his or her own benefit. When the trustee's duties towards the creditors of the bankrupt oblige the deregistering of an RRSP, the plan operator or administrator or trustee is required to withhold an appropriate amount of income tax as discussed in the preceding paragraph. Subsection 227(5) operates to make the trustee of the bankrupt individual also liable for required withholdings, as well as for other amounts that become due if the payer fails to comply with those provisions of the Act listed in paragraph 227(5)(a). The trustee in bankruptcy is a "specified person" under paragraph 227(5.1)(f) of the Act.

One of the intended results of the rules in subsections 227(5) and 227(5.1) is to secure the payment of source deductions and to share the responsibility for deducting and remitting taxes payable at source with persons with influence to cause or authorize the payment subject to tax at source. In the case at hand, the RRSP administrator or operator or trustee (the payer) has a responsibility under subsection 153(1) of the Act to withhold income tax and the agent for the trust company, as well as the trust company itself, and the trustee in bankruptcy are jointly and severally liable with the payer for the amounts payable under subsection 153(1), because of paragraph 227(5)(a), as well as any penalties and interest due as a result of the failure of the payer to comply with the requirements of the Act.

In summary, if the plan is deregistered, it is our opinion that subsections 227(5) and (5.1) of the Act may be applied to the situation described above, such that the trust company and the trustee in bankruptcy are jointly and severally liable for amounts required to be withheld and other amounts payable, such as penalties and interest, if the payer (the trustee of the RRSP or RRSP administrator or operator as the case may be) fails to withhold.

If you feel that you have a case that you should be exempted from the withholding requirements, the matter should be addressed to the client services division of your local tax services office.

We trust our comments will be of assistance to you.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate