4 March 2003 Internal T.I. 2003-0181737 - DEBT BALANCE OR OVERDRAFT IN A 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: Can an RRSP carry a debit balance (overdraft)?

Position: The Income Tax Act does not specifically prohibit it, however, depending on the particulars of the arrangements, may it constitute the borrowing of money or the use of trust property as security for a loan.

Reasons: Wording of paragraph 146(4)(a) and subsection 146(10).

		March 4, 2003

	REGISTERED PLANS DIRECTORATE	HEADQUARTERS
	André Martin, A/Director 	P. Kohnen, CMA
	Compliance Division	957-2093
	Place de Ville, Tower B

	Attention:  Andrea Suley
		2003-018173

Debit Balance in an RRSP

This is in response to your e-mail submission of January 7, 2003, with which you requested our comments on whether a registered retirement savings plan ("RRSP") may carry a negative cash balance (commonly referred to as a debit balance or overdraft). We note that your request is in respect of a submission received from XXXXXXXXXX, which was forwarded to the Registered Plans Directorate in October, 2002.

Generally, if an RRSP trust has borrowed money in the year, or borrowed money in a previous year that it has not repaid before the beginning of a particular year, paragraph 146(4)(a) of the Income Tax Act (the "Act") will require the trust to pay tax on its taxable income for the year. If an RRSP trust uses or permits to be used its property as security for a loan, the fair market value of the property that is used as security will be included in computing the income of the annuitant of the plan for the year, pursuant to subsection 146(10) of the Act.

In our document E9205726, dated April 22, 1992, we commented on a situation in which funds were made available to a plan annuitant before the proceeds from the sale of plan assets were received by the plan. We noted that "it is possible that the overdraft would constitute the borrowing of money or the use of the plan property as security for a loan, depending on the arrangements, such that subsection 146(4) or 146(10) of the Act would apply."

Technical interpretation 9531195, dated February 14, 1996, dealt with a scenario in which the terms of an RRSP trust allowed the trustee to collect unpaid fees from the trust property. We commented that "any resulting overdraft may constitute the borrowing of money from the trust or the use of property of the trust as security for a loan such that paragraph 146(4)(a) or paragraph 146(10)(b) of the Act could apply."

Document 2000-0052357, dated December 21, 2000, provides our responses to seven questions that were presented during the 2000 RRSP Industry Consultation Session in Ottawa. Our response to question two dealt with a debit balance or overdraft in an RRSP trust arising where an investment was purchased on behalf of the trust prior to receipt by the trust of funds from the plan annuitant. We noted that "depending on the arrangements, the overdraft may constitute the borrowing of money or the use of plan property as security for a loan such that subsection 146(4) or 146(10) of the Act will apply".

To summarize, the main points that may be derived from the above documents are as follows:

1. in general, overdraft in an RRSP trust may constitute the borrowing of money or the use of plan property as security for a loan, resulting in the adverse tax consequences of subsections 146(4) or 146(10), as applicable;

2. the position in 1 above will apply to overdrafts that arise due to various causes, such as a payment to the plan annuitant before funds are realized by the trust on the sale of trust assets, the collection of unpaid fees from the trust by the plan trustee, or the purchase of plan assets by the trust prior to the receipt of the necessary funds by the annuitant of the plan in the form of a contribution; and

3. in each case, the particulars of the arrangements that allowed the overdraft to arise must be examined to determine whether subsection 146(4) or 146(10) will apply.

We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at 957-2093 should you require further information.

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate

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