19 September 2005 External T.I. 2005-0118351E5 - Withholding rate for periodic RRIF payments

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 rate should be applied on periodic payments from an RRIF where the payments are instalments in satisfaction of a single request by an annuitant.

Position: The rate of withholding on each individual payment should be based on the total sum requested and not each individual payment.

Reasons: Based on our position as outlined in question 24 of the 2003 CRA RRSP/RRIF Session.

XXXXXXXXXX 		2005-011835
J. Gibbons, CGA
September 19, 2005

Dear XXXXXXXXXX:

Re: Withholdings on Payments from Registered Retirement Income Funds (RRIFs)

We are replying to your letter dated February 25, 2005, in which you requested clarification of the withholding requirements under subsection 153(1) of the Income Tax Act (the "Act") and Part I of the Income Tax Regulations (the "Regulations") for payments out of a "registered retirement income fund" (an "RRIF"). In particular, you are concerned with the withholding requirements for periodic RRIF payments where the annuitant has elected to receive more than the "minimum amount" in the particular year. Further, in an email dated March 25, 2005, you have asked us to comment on the implications where instalment payments are either increased or decreased during the year, an issue that was raised by the company that provides your banking system (the "software company").

Written confirmation of the tax implications inherent in particular transactions is provided by us only where the transactions are proposed and the subject matter of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

In your letter, you indicated that your current banking program, which is designed to withhold 10% from that portion of periodic RRIF payments that is determined to be in excess of the minimum amount, is wrong. The program determines the excess amount by computing a monthly average for the minimum payment and comparing this to the actual monthly payments. As an example, you stated that a minimum amount of $6,000 would yield a monthly average of $500 (i.e., $6,000/12) so that the system would withhold 10% of any amount that is in excess of $500. Thus, an amount of $50 would be withheld on a $1,000 monthly payment, (i.e., 10%($1,000 - $500)).

In your view, based on the answer to question 23 of the Canada Revenue Agency's (the "CRA's") 2003 RRSP/RRIF Consultation Session (the "2003 RRSP/RRIF Session"), the correct method is to determine the annual RRIF payments and compare this to the minimum amount to determine the excess amount. Thus, in the above example, the aggregate annual payments of $12,000 (i.e., $1,000*12) would be compared to the minimum amount of $6,000 to yield an excess amount of $6,000. Accordingly, the banking program would have to withhold 20% on each monthly payment, based on the rate set out in subsection 103(4) of the Regulations.

Our comments

In general terms, a payment from an RRIF in excess of the "minimum amount" (as defined under subsection 146.3(1) of the Act) is subject to withholding tax under subsection 153(1) of the Act and Part I of the Regulations. Because this excess amount is included in the definition of a "lump sum payment" in subsection 103(6) of the Regulations, it is subject to withholding tax at the rate set out in subsection 103(4) of the Regulations, as well as provincial or territorial withholding rates under the applicable provincial or territorial law. The combined federal and provincial or territorial withholding rates are, in general, 10% for amounts not exceeding $5,000, 20% for amounts exceeding $5,000 but not exceeding $15,000, and 30% for amounts exceeding $15,000. (Where Quebec rates are applicable, the rates are 5%, 10% and 15% respectively and payers must refer to the Quebec income tax rules for any other applicable withholding requirements.)

The withholding amount under subsection 103(4) of the Regulations is normally computed on each individual lump sum payment. However, if RRIF payments are in the nature of instalments made in fulfillment of a single request by an annuitant, it is the CRA's position that the rate of withholding on each individual payment should be based on the total sum requested and not on each individual payment. In this situation, the CRA considers these instalment payments to be blended payments consisting of an instalment of the minimum amount and an instalment of the lump sum payment. Accordingly, the latter portion would be subject to withholding tax under subsection 103(4) of the Regulations at the rate that would apply had the annuitant received one lump sum payment in the year equal to the amount by which the total instalment payments in the year exceed the minimum amount for the year.

Using your example, the appropriate rate would be based on there being one lump sum payment of $6,000 (i.e., the total annual payments of $12,000 minus the minimum amount of $6,000). Thus, consistent with your conclusion, the appropriate rate would be 20%. However, the rate should be applied only to that portion of each periodic payment that is in excess of the minimum amount. Thus, an amount of $100 or 20 percent of $500 (i.e., $1,000 - $500) should be withheld on each $1,000 payment.

As indicated in our answer to question 24 at the 2003 RRSP/RRIF Session, should an individual decide part way through the year to request an additional $4,000 payment, we would treat the additional $4,000 as a separate request and thus only 10% would have to be withheld on that specific payment, regardless of the amount of the ongoing instalment payments. However, where it appears that an annuitant is making separate requests in order to minimize the rate of withholding, for example, where a series of requests are made in a short period of time, it is our position that the withholding rate should be determined as if there was one request equal to the total amount requested. Thus, a higher withholding rate could apply. As we indicated in our answer to question 24, payers have to use their discretion in applying these rules.

In your email, you also requested that we review the following hypothetical examples, including proposed solutions, provided by the software company:

If an individual receiving $500 in monthly RRIF instalments (where the minimum amount is $2,400 or $200/month) increases his or her monthly instalments to $900 mid-way through the year, the withholding rate should be raised from 10% to 20% for the remaining payments based on the new annual total of $6,000 (i.e., $500*6 + $900*6 - $2,400), regardless if the lower rate results in a shortfall. On the other hand, if an individual receiving $1,300 in monthly RRIF payments (where the minimum amount is $8,400 or $700/month) decreases his or her monthly payments to $800, the withholding rate should be lowered from 20% to 10% based on the new annual total of $4,200 (i.e., $1,300*6 + $800*6 - $8,400). However, since the tax withheld from the RRIF payments for the first six months (i.e., 20%*($1,300 - $700)*6 = $720) would be greater than the amount of tax required to be withheld on a $4,200 lump-sum payment (i.e., 10%*4200 = $420), no further amounts would have to be withheld on the remaining instalment payments.

In our view, the solutions proposed by the software company would be consistent with the general policy set out in the answer to question 24 at the 2003 RRSP/RRIF Session. Alternatively, in the situation where the monthly RRIF payments are being reduced, it is our view that the payer may also apply the new withholding rate without taking into account the previous withheld amounts. Thus, in the software company's second example, an amount of $10 (i.e., 10%*($800-$700)) would be withheld on each $800 payment. As indicated previously, we expect payers to use their discretion when applying these rules.

We trust that these comments will be of assistance.

Yours truly,

Robin Maley
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch

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