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: Will a return of contribution from a member's registered pension plan to the employer be taxable, if the employer is resident on a reserve?
Position: May be taxable.
Reasons: Question of fact. General comments given on application of s. 87 Indian Act exemption.
2008-030099
XXXXXXXXXX L. Zannese
(613) 957-2747
February 24, 2009
Dear XXXXXXXXXX :
Re: Pension Plan-Return of Contributions to Employer
This is in response to your letter of October 7, 2008, inquiring as to the tax treatment of a return of a contribution from a member's registered pension plan account to their employer. As the employer may reside on a reserve, you ask whether your company is required to withhold tax on the amount returned 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 advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance 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 employee contributions to a registered pension plan are contained in Interpretation Bulletin IT-167R6, "Registered Pension Plans-Employee Contributions". Generally, the payment of any amount from a registered pension plan is included in income pursuant to subparagraph 56(1)(a)(i) of the Income Tax Act (the "Act") and is subject to tax and any applicable withholding requirements.
An Indian's personal property is exempt from tax pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act if that property is situated on a reserve. Although income is personal property, its intangible nature makes it difficult to determine its location. In Williams v. The Queen, the Supreme Court of Canada set out the connecting factors test to assist in this determination. The test requires identifying the various connecting factors that tie the income to a location either on or off a reserve and weighing the significance of each such factor.
The tax exemption described above is only available to individuals. Therefore, if the contributions are returned to an employer that is a corporation or a trust, then generally tax should be withheld from the payment as these entities do not qualify for a section 87 Indian Act exemption. However, if the payment is directed to an employer who is an Indian operating an unincorporated business, then regard must be had to the nature of the income underlying the original payments into the pension plan. If payments into the pension plan were made with business income that was exempt from tax, then contributions returned from the pension plan will generally be sufficiently connected to a reserve to be situated on a reserve and exempt from tax.
In determining whether business income is situated on a reserve, and thus exempt from tax, the key factor is the location of the income-earning activities of the business. A second relevant factor is the location of the customers of the business. Whether any particular income is situated on a reserve is a question of fact that can only be determined once all facts of the situation are reviewed.
We trust that these comments will be of assistance.
Yours truly,
Eliza Erskine
A/Manager
Non-Profit Organizations and
Aboriginal Issues
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
CC: Mr. Les Zilkie
Winnipeg Tax Services Office
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