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:
1. Will fishing income earned by a status Indian in a specific situation be subject to income taxes?
2. Can exempt income be used to contribute to an RRSP?
Position:
1. Handled in another file.
2. No.
Reasons:
1. Memo 2003-001209 to TSO deals specifically with the taxpayer's situation.
2. No earned income to create RRSP room.
XXXXXXXXXX 2003-001673
June 26, 2003
Dear XXXXXXXXXX:
Re: Taxation of Fishing Income Earned by a Status Indian
We are writing in reply to your letter of March 16, 2003, which we received from the XXXXXXXXXX Tax Centre on May 7, 2003, wherein you requested our views regarding the taxation of the fishing income that you earn as a status Indian.
In our memorandum to the XXXXXXXXXX Tax Services Office (our file # 2003-001209 issued on June 10, 2003), we addressed your situation and provided our views regarding the taxation of your fishing income. We enclose a severed copy of the memorandum.
Your letter mentions amounts received from a registered retirement savings plan ("RRSP") established with funds that were exempt from income taxes. We will provide you with our general views regarding RRSPs and exempt income earned by status Indians.
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 a status 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exempt from income tax pursuant to the Act and the Indian Act, the contributions will not be subject to income tax when withdrawn from the RRSP since no deduction was available when the contribution was made. 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. Where the over-contribution arose as a result of reasonable error and 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 memorandum and the above comments will be of assistance to you.
Yours truly,
Mickey Sarazin, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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