7 February 2018 Internal T.I. 2017-0711961I7 - Withholding on RCA payment to partnership

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: In applying subsection 106(1) of the Income Tax Regulations with respect to a payment to a recipient that is a partnership, how does one determine the amount to be withheld under that subsection?

Position: The amount to be withheld should be equal to the amount of tax that the members of the partnership would, in aggregate, be expected to pay under the Income Tax Act with respect to the payment.

Reasons: Application of the Regulation.

									February 7, 2018

Kim Scharfe			 					HEADQUARTERS
Employer Services and Trust Compliance Section		Income Tax Rulings
Debt Management Compliance Directorate			  Directorate
Taxpayer Services and Debt Management Branch		V. Pietrow

									2017-071196

SUBJECT: Withholding on RCA payment to partnership

We are writing in reply to your email of June 29, 2017 in which you asked for our views concerning withholding requirements on a payment from a retirement compensation arrangement (RCA) to an employer that is a partnership.

The RCA consists of a supplementary retirement plan for one employee. The employer has written to the CRA stating that the RCA has developed a surplus that it wishes to withdraw. The employer has requested a waiver letter in order for the custodian of the RCA to not withhold tax under subsection 153(1) of the Income Tax Act (the “Act”) on the payment (the “Payment”). No other payments are expected to be made from the RCA to the employer in the year. The employer argues that the withholding should be nil because the employer, as a partnership, is not taxable under Part I of the Act.

Position

Subsection 106(1) of the Income Tax Regulations (the “Regulations”) is applicable in determining withholding in this situation. As the employer is a partnership, the amount to be withheld from the Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the partnership with respect to the Payment.

Comments

1. Taxation of the partnership’s income

Any amount received by an employer in the course of a business from an RCA to which the employer made deductible contributions is included in computing the employer’s income under paragraph 12(1)(n.3) of the Act. However, as the employer in this case is a partnership, subsection 96(1) of the Act applies. That subsection generally provides that a partnership is a “flow-through” entity, with income computed at the partnership level (as if the partnership were a separate person) and allocated to the members of the partnership. Each member, in turn, reports and pays tax on their proportionate share of such income. The sources of income retain their character when flowed from the partnership to the members of the partnership.

2. Withholding rules

Pursuant to paragraph 153(1)(q) of the Act, where the custodian of an RCA makes a distribution from the RCA, the custodian is required to withhold the amount determined under the rules set out in Part I of the Regulations and to remit the amount to the Receiver General.

Subsection 103(4) of the Regulations sets out the applicable withholding rates for lump sum payments made to a recipient who is a resident of Canada. A “lump sum payment” is defined for the purposes of subsection 103(4) in subsection 103(6) of the Regulations. Unless an RCA is a superannuation or pension plan that is being wound up, a payment of surplus from an RCA to an employer is not a “lump sum payment” under this definition (see paragraph 103(6)(a) of the Regulations and clause 40(1)(a)(i)(B) of the Income Tax Application Rules).

Since the Payment is not a “lump sum payment” for the purposes of the withholding rules, it is subject to subsection 102(1) of the Regulations. Schedule I to the Regulations sets out withholding rates for specified types of pay periods for the purposes of paragraph 102(1)(c). Where a period or amount is not addressed in Schedule I, withholding is determined in accordance with the general rule in subsection 106(1) of the Regulations. Since Schedule I does not address this situation, the Payment is subject to subsection 106(1). Under this rule, withholding is generally based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.

Although no tax is payable under Part I of the Act by a partnership, subsection 96(1) of the Act ensures that the members of the partnership are taxable on their respective share of the partnership’s income. In our view, in applying subsection 106(1) of the Regulations in this situation, the amount to be withheld from the Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the employer partnership with respect to the Payment.

This position is consistent with subsection 96(1) of the Act and is justifiable under a textual, contextual and purposive interpretation of subsection 106(1) of the Regulations.

Credit to partners for income tax withheld

In filing their income tax return for the taxation year in which they report their share of the partnership’s income, each member of the partnership would be entitled to apply their share of the income tax withheld in respect of the Payment.

We trust our comments will be of assistance.

Yours truly,

Dave Wurtele
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch