6 March 1986 Income Tax Severed Letter 5-0145 - [860306]

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.

G. Kauppinen (613) 995-0051

March 6, 1986

Dear XXXX

This is in reply to your letter dated November 16, 1985 in which you requested our comments with respect to investments held by self-directed registered retirement savings plans ("SDRSP").

Specifically, you have posed the following questions:

1. Most such plans invest the maximum 10% in qualified foreign investments. But when dividends are paid on such investments, then (pursuant to treaty), withholding tax is applied. Since the plan itself is not subject to tax, the owner of the plan gets no information slip and while you are not suggesting that the owner should be able to offset such withheld tax against other income, this withheld tax appears "to slip through a crack" and the planholder simply does pay tax on a portion of the income of his SDRSP. Is there any mechanism by which the planholder can recover this (within the plan) -- or is this simply a "penalty" arising from the fact of having made a foreign investment within his plan? Granted, in the individual case, the amounts involved are usually not large, but in total for such plans the amount must be substantial. You appreciate that this is a treaty matter and therefore not susceptible of simple solution in that respect, but you ask if there is any provision, regulation or otherwise, that answers this situation?

2. When the holder of a SDRSP makes a buy or sell of an investment, through his investment broker issuer, the broker simply deducts his commission from the plan's funds. Since the object of the planholder is to keep all of his invested funds working to build up his RSP, can the planholder pay such commissions directly from his own other funds -- and, if so, would such payments be deductible expenses made for the purpose of earning income?

We have the following comments with respect to your questions:

When dividends are paid to a RRSP from a foreign investment, withholding tax may be exigible pursuant to the domestic law of the country of source. If Canada has entered into a bi-lateral tax treaty ("treaty") with the country in question, provisions of the treaty will over-ride any otherwise contrary provisions in the domestic laws of both countries.

Therefore, since you have not referred to a specific foreign country withholding tax may or may not be withheld on foreign source dividends pursuant to the domestic law of the particular foreign country and any over-riding provisions of an existing treaty, if applicable.

However, to use the United States as an example, Article XXI of the Canada-U.S. Tax Convention provides at paragraph 2 thereof that a trust, a company, or other organization resident in one country, constituted and operated exclusively to administer or provide benefits under one or more funds or plans established to provide pension, retirement or other employee benefits is exempt from tax on dividends and interest arising in the other country, if the organization is generally exempt from tax for that taxable year in the country of residence. This provision does not apply if the trust, company or other organization carries on a trade or business or receives income from a related person (other than another exempt organization). Since a RRSP is generally exempt from tax under Part I of the Income Tax Act ("Act") pursuant to paragraph 149(l)(r) therein, dividends and interest received by the RRSP from U.S. investments should not be subject to U.S. withholding tax pursuant to Article XXI of the Treaty as discussed above. Presumably permission would have to be obtained from the appropriate U.S. regulatory authorities to permit the payor of the U.S. source income to not remit withholding tax. As stated above, the tax ramifications would have to be examined separately with respect to each foreign country.

The recognition of the commission expense must be made by the RRSP and not the annuitant. If the annuitant did in fact pay the commission expense, no deduction would be available to the annuitant. Furthermore, if the annuitant paid the commissions personally, section 204.2 of the Act could deem him to have made a gift to the RRSP. If, by virtue of section 204.2 the annuitant is deemed to have made an over-contribution to the RRSP, then the RRSP could be subject to Part X.1 tax.

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on the Department.

We trust the foregoing is of assistance in these matters.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch