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: With respect to a status Indian whose employment income was tax exempt, are benefits received from a deferred profit sharing plan or a group RRSP in relation to such employment taxable?
Position: Question of fact
Reasons: Consistent with previous positions and based on the connecting factors test
2005-012556
XXXXXXXXXX Kimberly Duval
(613) 599-6054
June 27, 2005
Dear XXXXXXXXXX:
Re: Taxation of Benefits Received by a Status Indian from a Deferred Profit Sharing Plan or a Group Registered Retirement Savings Plan
This is in response to your letter of April 7, 2005 inquiring as to whether benefits received under a Deferred Profit Sharing Plan (DPSP) or a group Registered Retirement Savings Plan (RRSP) would be subject to tax when received by a status Indian where the related employment income was earned on reserve and exempt from tax.
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
The CRA's general views regarding the taxation of benefits received under an RRSP or a DPSP are described in the CRA's tax guide T4040, "RRSP's and Other Registered Plans for Retirement" and in Information Circular IC 77-1 "Deferred Profit Sharing Plans". Generally speaking, any amount received under either plan is required to be included in calculating an individual's income pursuant to subsections 146(8) and 147(10) of the Income Tax Act (the "Act").
Benefits Received by a Status Indian from an RRSP
A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", within the meaning assigned by subsection 146(1) of 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 on "excess amounts" held by an individual's RRSP at the end of each month. For a status Indian earning no other employment income other than exempt income, excess amounts will be calculated on cumulative contributions to an RRSP out of this exempt income that have not been withdrawn from the RRSP before the end of a particular month. However, provided that the only RRSP contributions made by the status Indian individual were mandatory contributions resulting from participation in a qualifying group RRSP, the individual will generally not have made an over-contribution to an RRSP for purposes of the Part X.1 tax. In a situation where an on-reserve employer only employs status Indian employees earning tax-exempt income, this administrative concession would not apply.
Similarly, where an individual makes RRSP contributions additional to those that are mandatory by virtue of the group RRSP program, Part X.1 tax may apply. However, if the over-contribution arose as a result of reasonable error and if steps are taken to remove any excess amounts from the RRSP, the law provides that the Minister of National Revenue may waive the penalty tax. You should contact your local TSO directly, in this regard.
Benefits Received by a Status Indian from a DPSP
Generally, amounts received in a taxation year by a beneficiary from a trust governed by a DPSP or revoked plan shall be included in calculating the beneficiary's income for the year pursuant to subsection 147(10) of the Act. However, it is the CRA's view that when payments are made from a DPSP to a status Indian that effectively related to employment income that was exempt from tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act, these benefits will usually be exempt from tax as well. If only a portion of the related employment income was exempt from tax, the exemption with respect to the benefits received from the DPSP will be similarly prorated.
We trust that these comments will be of assistance.
Yours truly,
Roxane Brazeau-LeBlond, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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