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: What are the tax consequences where damages suffered by an RPP and RRSP are to be paid into the plans as a result of a class action lawsuit?
Position: 1) No employment income inclusion to employees (members of the RPP). 2) Damages are not considered a contribution to the RPP or RRSPs.
Reasons: Damages paid in respect of a bad investment suffered by RPP members are not paid by virtue of employment and should not be subject to contribution limits.
January 23, 2004
HEADQUARTERS HEADQUARTERS
Registered Plans Directorate Income Tax Rulings
Allan Robusky Directorate
A/Manager G. Allen
Technical Services Section 952-9853
2003-005193
Payment of Damages - XXXXXXXXXX
This is in reply to your memorandum dated November 28, 2003, wherein you requested our opinion regarding a proposal concerning a settlement to be paid to the XXXXXXXXXX Pension Plan and to the registered retirement savings plans (RRSP) of former employees of XXXXXXXXXX.
As agreed in your telephone conversation (Robusky/Allen) on January 15, 2004, we will not comment on the consultant's proposed methodology for allocating the settlement within the various deferred income plans and will only comment on the tax consequences of the settlement being paid to the deferred income plans. We note that in the consultant's letter dated May 27, 2003, attached to your memorandum, he requests various rulings. You may wish to refer the consultant to Information Circular 70-6R5 which contains information concerning the advance income tax rulings process.
The Canada Revenue Agency's position concerning the tax consequences of a payment of damages to a registered retirement savings plan is contained in ATR-24. Where an investment management company has caused a loss to an RRSP and damages are paid pursuant to an out-of-court settlement or court order, the amount is not brought into the annuitant's income in the year it is paid to the RRSP trust nor is it included in the calculation of the amount subject to Part X.1 tax under the Income Tax Act (the "Act").
The interpretation in ATR-24 is equally applicable to other registered deferred income plans. Thus, where the damages are paid into a registered pension plan, deferred profit sharing plan or registered retirement income fund, the amount is neither brought into the plan member's or annuitant's (hereinafter referred to as "plan member") income in the year the damages are paid to the registered plan nor does the payment of such an amount constitute a contribution for purposes of the pension credit calculation (Part LXXXIII of the Income Tax Regulations) or as prohibited under paragraph 146.3(2)(f) of the Act.
Furthermore, in some circumstances where the registered plan which suffered the losses is no longer in existence or the plan member's RRSP has matured or been converted to a RRIF, damages may be paid into the plan member's new or successor registered plan with the same tax consequences as damages could have been paid to the original plan.
Finally, where damages in respect of a breach of contract or tort are paid by the employer to compensate for investment losses caused by the employer as administrator of a registered plan which has been established for a group of employees, such damages paid by the employer to the employees' accounts within the registered pension plan or deferred profit sharing plan or to the individual's RRSPs or RRIFs are not considered employment income to the employees. In these circumstances, neither the employer nor the employee are considered to have made a contribution to the plan as a consequence of the payment of the damages and, thus, there is no contribution deduction available.
For your information, we have enclosed a copy of ATR-24 and a copy of ruling 9903533 that concerns damages paid to a registered pension plan.
Roberta Albert, CA
Manager
Income Tax Rulings Directorate
Policy and Legislation Branch
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