16 October 2002 External T.I. 2002-0159485 - TAXATION OF INDIAN RPP ROLLED TO RRSP

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:

Does tax-exempt status apply to rollover to RRSP of a status Indian beneficiary's interest in deceased status Indian's RPP?

Position: Likely yes

Reasons:

If RPP member's employment income was tax-exempt, and the beneficiary is a status Indian, the Guidelines exempt both principal & investment income from taxation.

2002-015948
XXXXXXXXXX R. Shields
(613) 948-5273
October 16, 2002

Dear XXXXXXXXXX:

Re: Tax exempt status of survivor pension

This is in response to your letter of August 21, 2002 inquiring about whether registered pension plan (RPP) survivor benefits payable to a status Indian beneficiary of a status Indian RPP member remain tax-exempt upon transfer to a registered retirement savings plan (RRSP).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA").

The CCRA's position concerning the taxation of pension income of a status Indian is reflected in the Indian Act Exemption for Employment Income Guidelines. In short, income that is ancillary to employment income, such as pension income and Canada Pension Plan benefits, is treated the same as the employment income itself. In other words, if the employment income earned by a status Indian was exempt from taxation under paragraph 81(1)(a) of the Income Tax Act (the "Act") and section 87 of the Indian Act, any pension benefits relating to that exempt employment income that are received by the status Indian will also be exempt from tax. Any pension benefits paid to a status Indian beneficiary of the particular status Indian subsequent to his or her death would also be exempt from tax.

When the amounts held in an RRSP relate to amounts transferred from an RPP which in turn related to tax-exempt employment income, the CCRA's position is that payments of both principal and investment income from these RRSPs will usually be exempt from tax. Whether the RRSP was locked in or non-locked in will have no bearing on the tax status of these amounts.

We should point out that if the status Indian beneficiary takes a cash payment of the non-locked in portion of the tax-exempt RPP benefit, the cash payment will be tax-exempt. However, subsequent investment income earned with the funds may be subject to taxation under the Act. Based on the decision in Recalma v. The Queen, it is necessary to determine the location of the issuer's income-generating activity in respect of the investment instrument. Unless the interest income can be identified as exclusively generated on a reserve, it is the CCRA's position that the interest income is not tax exempt. For the CCRA to consider an Indian's investment income to be tax exempt, the investment income would have to be from an on-reserve financial institution that generates its income exclusively from investments and loans to Indians on a reserve and it has to be established that the loans and investments are used by Indians for development on the reserve. In addition to the above-mentioned test for the financial institution, in our view, other connecting factors would still have to be present such as the Indian having to live and work on a reserve.

We trust that these comments will be of assistance.

Yours truly,

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