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.
Principal Issues: What portion, if any, of payments received by a status Indian from an RRIF will be tax exempt.
Position: The RRIF payments will be taxed in the same manner as payments from the particular registered plan from which property was transferred to the RRIF.
Reasons: Based on connecting factors test.
November 2, 2004
REGINA TSO HEADQUARTERS
Client Services J. Gibbons, CGA
(613) 957-2135
Attention: Marilyn Kraine
2004-007016
Taxation of RRIF Payments to XXXXXXXXXX
We are replying to your memorandum dated March 30, 2004, concerning the income tax treatment of amounts received by XXXXXXXXXX (the "Taxpayer"), a status Indian, from his registered retirement income fund ("RRIF").
The Taxpayer states that amounts received from his RRIF are tax-exempt and thus he has requested a waiver from withholding taxes on such payments. In support of his claim, the Taxpayer has provided a letter from XXXXXXXXXX (the "Employer") indicating that he was employed by them from XXXXXXXXXX until XXXXXXXXXX. Since no other information has been provided, we have presumed that all of the Taxpayer's RRIF funds were furnished using income earned from this employment and all of the duties of employment were carried on at the Employer's location.
XXXXXXXXXX.
In order to determine the income tax treatment of payments received by a status Indian from an RRIF, reference must be made to the income tax treatment that would have applied to the particular registered plan(s) from which property was transferred to the RRIF. The RRIF payments will be taxed in the same manner as payments from the particular registered plan. In this regard, you may want to review the relevant information provided on the CRA website at http://www.cra-arc.gc.ca/aboriginals/status-e.html#heading4.
Registered Pension Plans ("RPP")
The CRA's position concerning the taxation of income from an RPP 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 in the same manner as the employment income itself. In other words, if the employment income earned by a status Indian was partially or completely 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, including the investment earnings within the particular plan, will also be partially or completely exempt. Therefore, payments from a RRIF that received funds from a pension plan whose benefits would have been partially or completely exempt under the Indian Act would also be partially or completely exempt on the same basis.
Registered Retirement Savings Plans
Where a status Indian has taxable employment income, he or she will have "earned income" as defined in subsection 146(1) of the Act, and will be entitled to contribute to an RRSP within the limits that apply to all taxpayers. Any withdrawals from the RRSP in such cases are taxable.
If a status Indian's income was exempt under paragraph 81(1)(a) of the Act and section 87 of the Indian Act, he or she would not have any earned income and would not be entitled to a deduction for RRSP contributions. If it is apparent that a status Indian inadvertently used exempt income as a basis for making RRSP contributions, such contributions may be withdrawn without having to include the particular amounts in income. Whether this is the case in a particular situation is a question of fact. Nonetheless, any investment income earned on RRSP contributions, whether deductible or not, will normally be taxed on distribution from the RRSP pursuant to the connecting factors test.
Similarly, if a status Indian earning both exempt and taxable employment income inadvertently bases a portion of his or her RRSP contributions on exempt income, the status Indian may, subject to CRA's discretion as to whether the over-contributions were inadvertent, withdraw the over-contributions from the RRSP without having to include the particular amounts in income. All other withdrawals from the RRSP (i.e., those related to deductible contributions and investment income) would be taxable.
Note that when a status Indian over-contributes to an RRSP, whether inadvertently or not, Part X.1 of the Act will apply in respect of the over-contributions to the RRSP. However, if reasonable steps are taken to eliminate the excess, such tax may be waived pursuant to subsection 204.1(4) of the Act. Further, although the "cumulative excess amount," which is the base amount on which Part X.1 tax is calculated, can technically only be reduced by an RRSP withdrawal if the amount is included in income, it is our view that the withdrawal of RRSP over-contributions by a status Indian will also reduce the cumulative excess amount even though such withdrawal may have been excluded from income.
Although no details have been provided, we suspect that the Taxpayer's RRIF funds were received entirely from a registered retirement savings plan (a "RRSP") to which the Taxpayer had made regular contributions only.
If the Taxpayer contributed amounts to his RRSP, claimed the deductions in computing his taxable income and subsequently transferred the RRSP property to an RRIF, all of the payments from the RRIF will be taxable.
If, after reviewing all of the relevant facts, you are satisfied that the Taxpayer inadvertently over-contributed amounts to his RRSP, the Taxpayer may exclude a portion of his RRIF payments from income (based on the proportion of plan funds comprised of such over-contributions). All other payments from the Taxpayer's RRIF will be taxable, including any portion related to investment income on over-contributions. On the other hand, if you determine that the taxpayer knowingly over-contributed to his RRSP, all of the payments received by the Taxpayer from his RRIF should be included in income.
For your information a copy of this memorandum will be severed using the criteria in the Access to Information Act and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should the Taxpayer request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
If we can be of any further assistance, please feel free to contact the author or the undersigned.
Roxane Brazeau-LeBlond, CA
Manager
Aboriginal and Non-Profit Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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