15 July 2005 External T.I. 2005-0130471E5 - DPSP Forfeitures and Withholding

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: Where a forfeited amount is paid out of a deferred profit sharing plan to the employer and where the employer subsequently contributes part of the forfeited amount back into the plan as a contribution or repayment of expenses such that the actual payment from the plan to the employer is a net amount (the total forfeited amount less the amount of the subsequent contribution or expense reimbursement), will the reporting and/or withholding tax requirement be based on the gross or net amount of the payment to the employer?

Position: Reporting and tax withholding on the gross forfeited amount

Reasons: Consistent with previous positions and based on the "constructive receipt doctrine"

XXXXXXXXXX 2005-013047
Kimberly Duval
(613) 599-6054
July 15, 2005

XXXXXXXXXX:

Re: Withholding on Forfeiture Amounts from a Deferred Profit Sharing Plan

This is in response to your e-mail correspondence of May 10, 2005 and subsequent telephone conversations (Duval/XXXXXXXXXX) wherein you requested our opinion concerning the requirements imposed by the Income Tax Act (the "Act") to report and/or withhold taxes on forfeited amounts paid from a deferred profit sharing plan ("DPSP"). Specifically, you have asked us to consider the reporting and/or withholding requirements in relation to a forfeiture payment from a DPSP where, in the circumstances, the employer subsequently contributes a lesser amount back to the plan as a contribution or reimbursement of expenses such that only a net amount is actually paid out to the employer.

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.

Pursuant to paragraph 153(1)(h) of the Act, any person who makes a payment under a DPSP in the year shall withhold from the payment, an amount determined in accordance with the prescribed rules and remit that amount to the Receiver General at the prescribed time. The prescribed amount and the prescribed time are set out in Part I of the Income Tax Regulations (the "Regulations").

Specifically, where a DPSP refunds a forfeited amount to an employer, such an amount would constitute a payment as described by paragraph 153(1)(h) of the Act. Accordingly, subsection 200(1) of the Regulations would apply in these circumstances and the payer would be required to report the forfeited amount paid out of the plan to the employer on a T4A Supplementary form.

Further, for purposes of the withholding requirements under subsection 103(4) of the Regulations, any payment from a DPSP (other than as referred to in subparagraph 147(2)(k)(v) of the Act) will be considered a lump sum payment pursuant to paragraph 103(6)(b) of the Regulations and therefore, will be subject to withholding at the lump sum rates. It is important to note that subsection 100(1) of the Regulations defines an "employer" for these purposes as any person paying remuneration and defines an "employee" as any person receiving it.

The word "payment" or "paid" is not defined in the Act and therefore, must be given its ordinary meaning. The Black's Law Dictionary defines this term to mean "to discharge a debt or to deliver to a creditor the value of a debt, either in money or in goods". As such, it is our view that an amount is considered "paid" where it involves the actual or constructive delivery of money or its equivalent in return for goods or services or in discharge of an obligation. The constructive delivery of money involves an actual payment, although made to a third party, for the benefit of the payee. The doctrine of constructive payment or receipt was examined in the case of Markman v. The Queen (89 DTC 253), where the following comments were made:

"...the doctrine of constructive receipt... applies only when a payment has been made by a payor to a party who is not the payee, but was made for the benefit of the payee or in satisfaction of an obligation contracted by him. As the expression 'constructive receipt' implies there must have been a payment and that payment must have been received by someone before the doctrine may be invoked."

It is our understanding that the funds were made available to the employer notwithstanding the fact that, at the employer's request, the funds were retained in the plan as future DPSP employer contributions or a reimbursement to the plan for expenses. The payment of the net amount from the plan simply represents the combination of two distinct transactions - the payment of the forfeited amount and the subsequent contribution or expense payment to the plan by the employer. It is our view that the application of 153(1)(h) of the Act with respect to tax withholding would apply to the gross forfeited amount that was constructively received by the employer. Similarly, this view would also extend to the reporting and tax withholding of a forfeiture payment to an employer from a retirement pension plan under paragraph 153(1)(b) of the Act.

We have been advised by the Trust Accounts Division that there are no administrative exceptions that would allow the payer to withhold on the net amount of the payment from the DPSP.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, C.A.

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