8 November 2022 Internal T.I. 2022-0938431I7 - RPP Remedial Payments

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: Whether a remedial payment made by an insurer to a member’s defined contribution account of a registered pension plan is a contribution for purposes of paragraph 147.2(1)(a) and taxable to the member under section 5 or 6?

Position: Question of fact.

Reasons: A remedial payment made to a registered pension plan in respect of an actionable loss suffered by the plan does not constitute a contribution or gift to the plan and will not result in an income inclusion to the member.

                                          November 8, 2022

HEADQUARTERS                              HEADQUARTERS
Registered Plan Directorate               Income Tax Rulings Directorate
                                          Darren Odubella

                                          2022-093843

Attention: Jeff Boxer

RE: Remedial Payments to a Registered Pension Plan

We are writing in response to your email dated June 1, 2022, wherein you requested our views on the income tax treatment of a remedial payment. In particular, you have asked us to consider whether a remedial payment made by an insurer to a member’s defined contribution account of a registered pension plan (“RPP”) in respect of investment losses suffered by the RPP caused by an error in implementing instructions to change the default fund is a contribution for purposes of paragraph 147.2(1)(a) of the Income Tax Act (“Act”). (footnote 1)

Our comments

It has been our long-standing position that the tax consequences of a settlement payment made to an RPP in respect of an actionable loss suffered by the RPP does not constitute a contribution or gift to the plan and will not result in an income inclusion to the member. The position is based on the surrogatum principle, which generally provides that the tax consequences of a settlement are based on the nature and purpose of the settlement and the amount it is intended to replace.

The determination of what an amount is intended to replace is a question of fact and we can only make such a determination after examining all the relevant facts and documentation of the case. Accordingly, such a determination can only be made in the context of an advance income tax ruling request submitted in the manner set out in IC70-6R12.

However, in the situation described, the remedial payment appears to be a return of investment or damages, intended as compensation for a financial loss suffered by the RPP as a consequence of the failure to implement instructions to change the default fund. As such, there does appear to be an actionable loss suffered by the RPP and the remedial payment appears to replace the loss suffered by the RPP and consequently the remedial payment should not constitute a contribution or result in an income inclusion to the member.

We trust our comments will be of assistance.

Yours truly,

Irina Schnitzer
A/Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise noted, all references herein are to the Act.