3 October 2007 External T.I. 2007-0250341E5 - Collapsing an EPSP & Changing Service Providers--R

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: 1. What are the tax consequences for the members of the plan of collapsing an EPSP to create a new saving vehicle? 2. Is the transfer of an RRSP from one service provider to another a taxable event?

Position: 1. May transfer property, other than cash, at cost to a beneficiary. If the transfer is to a person other than another EPSP trust then a disposition occurs and may have to allocate any capital gains realized to beneficiaries.

2. Generally yes, refer to CRA website.

Reasons: 1. Subsection 144(7.1) of the Income Tax Act. Definition of disposition in subsection 248(1) of the Act. 2. Subsection 146(16) of the Act.

XXXXXXXXXX 2007-025034
L. Zannese
(613) 957-2747
October 3, 2007

Dear XXXXXXXXXX:

Re: Collapsing an Employee Profit Sharing Plan (EPSP) and Changing Service Providers for employees Registered Retirement Savings Plan (RRSP)

This is in response to your letter of August 20, 2007 inquiring about our views on two issues. We acknowledge the further information we received from you during a telephone conversation (XXXXXXXXXX \Zannese) with our office on September 28, 2007.

Your first question is what are the tax consequences to the members of collapsing an EPSP to create a new saving vehicle. You also ask if transferring employee's RRSPs from one service provider to another will be considered a taxable event.

The situations outlined in your letter appear to relate to factual ones, 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.

1. Collapsing of an EPSP:

You advise that your client will be collapsing an EPSP in order to create a new savings vehicle for their employees. You ask what the tax consequences will be to members of the EPSP.

An EPSP is a trust that is not subject to tax under subsection 144(2) of the Income Tax Act (the "Act"). Instead, subsection 144(3) of the Act requires the EPSP to allocate all the income and capital gains it realizes in a year to the beneficiaries (members) of the plan.

For the year in which an EPSP is collapsed, the beneficiaries would be allocated their respective share of any income earned by the plan. If the collapse of an EPSP results in the plan having disposed of any assets it owns, then the beneficiaries will also have allocated to them a portion of any capital gains realized by the plan as a result of the disposition.

In general terms, if property other than cash is transferred to a beneficiary out of a trust governed by an EPSP, the provisions of subsection 144(7.1) of the Act will apply such that the trust will not have a capital gain and the beneficiaries will acquire the property for the cost amount of the property to the trust. As a consequence the beneficiaries would not be allocated a capital gain from the disposition and would only be taxed on any increase in value of the property when it is subsequently disposed. Beneficiaries may also be able to apply any exempt capital gains balance they have to the cost of the property received.

If the property held in a trust governed by an EPSP is transferred to a person other than a beneficiary, a disposition of the property will occur unless the other person is also a trust governed by an EPSP and the transfer satisfies the conditions set out in paragraph (f) of the definition of "disposition" found in subsection 248(1) of the Act. If a disposition occurs and a capital gain is realized the gain would need to be allocated to the beneficiaries of the EPSP as described above.

2: Change of Service Providers for Employee's RRSPs.

You ask if it is possible for an employer to transfer a group RRSP from one service provider to another without triggering any tax consequences.

Generally, it is possible to transfer RRSP's from one issuer or carrier to another without incurring any tax. The CRA website at: www.cra-arc.gc.ca/tax/registered/rrsp-rrif/faq-e.html#change provides a number of questions and answers pertaining to the administration of RRSPs. Question 3 provides a detailed explanation of how to change the issuer or carrier of a plan. If you require additional information on these procedures please contact our Registered Plans Division using one of the methods described in www.cra-arc.gc.ca/tax/registered/contact-e.html .

We trust that these comments will be of assistance.

Yours truly,

Wayne Harding
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch