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.
Please note that the following document, although believed to be
correct at the time of issue, may not represent the current
Position of the Department.
Prenez note que ce document, bien qu'exact au moment ‚mis, peut
ne pas repr‚senter la position actuelle du ministŠre.
Principal Issues:
taxation of the withdrawal of RRSP funds by a trustee for an
insolvant person
Position TAKEN:
withdrawal of RRSP funds is included in the insolvant person's
income for the year
Reasons FOR POSITION TAKEN:
an insolvant person is not a bankrupt person so 128 doesn't apply
& if the RRSP vests with the trustee, 146(2)(c) will require the
insolvant person to include the RRSP funds in income because of
the divesting to the trustee
May 16, 1994
HEAD OFFICE
WINNIPEG DISTRICT OFFICE Rulings Directorate
A. Humenuk
957-8953
Attention: Debbie O'Grady
940229
A Proposal filed by an Insolvent Person
We are replying to your memorandum of January 27, 1994, concerning the deregistration of an RRSP in accordance with the terms of a proposal filed by an insolvent person. Reference is also made to the letter from XXXXXXXXXX.
XXXXXXXXXX is questioning the correct manner of reporting the deregistration of an RRSP where the RRSP vests with a trustee under a proposal filed by an insolvent person under Part III of the Bankruptcy and Insolvency Act. It is his view that where the terms of a proposal provide that the assets of an insolvent person vest with the trustee, the income from those assets should be reported by the trustee in a manner similar to that of the return filed by a trustee on behalf of a bankrupt person.
The return or returns filed by a trustee on behalf of a bankrupt are filed in accordance with section 128 of the Income Tax Act (the Act). "Bankrupt" and "estate of the bankrupt" have the meanings assigned by the Bankruptcy and Insolvency Act and do not include an insolvent person (as defined in the Bankruptcy and Insolvency Act) or a trust created for the purpose of settling the debts of an insolvent person. Accordingly, notwithstanding any apparent similarities between the handling of a bankrupt's affairs and that of an insolvent person, the provisions of section 128 of the Act for reporting the income of a bankrupt will not apply to an insolvent person. Consequently, unlike an individual who makes an assignment into bankruptcy, an insolvent person who has filed a proposal does not file two returns for the year in which the proposal is made.
The taxation of income derived from the assets of an insolvent person which vest with the trustee according to the terms of a proposal will be dependant upon whether the relationship between the trustee and the insolvent person is that of a trust or an agency. While the question of whether a trust comes into existence as a result of the proposal is a matter of fact and
trust law, it would appear that XXXXXXXXXX question is premised on the assumption that it does.
A trust is essentially a relationship between the trustee and the beneficiary. The trustee has ownership and control of the trust property and is under obligation to deal with the trust property for the benefit of the beneficiary. In order that a trust exist,
three elements must be present: certainty of intention, certainty of subject matter (the trust property) and certainty of
objects (the beneficiaries). The trust, once created, is beyond later intervention by the settlor, unless powers have been
reserved for some express purposes, and generally, the beneficiaries have no authority to instruct the trustee on how to employ the trustee's powers.
In a contract of agency, the agent administers property, usually vested in the principal, according to the principal's
instructions, which can be varied at any time according to the instructions of the principal.
If the trustee is acting as agent for the insolvent person, the income earned on assets held by the trustee is included in the insolvent person's income for the year. If the proposal has created a trust by vesting the assets with the trustee, the income from the assets would be reported on a inter vivos trust return. However, the assignment or transfer of an RRSP or assets
held therein to the trustee would be contrary to the rules governing RRSPs and in particular, contrary to paragraph 146(2)(c) of the Act. Consequently, where the annuitant has divested himself or herself of the RRSP (as would happen if the RRSP vested with the trustee), the annuitant would be required to include the fair market value of the property in the RRSP in income by reason of the assignment or transfer to the trustee.
This result doesn't occur in the case of bankruptcy because paragraph 128(2)(a) of the Act deems the trustee to be the agent
for the bankrupt notwithstanding that the assets vest with the trustee by operation of the bankruptcy legislation.
While we advised XXXXXXXXXX in our telephone conversation of March 2, 1994 (XXXXXXXXXX/Humenuk) that an inter vivos trust pays tax at the highest rate, you may wish to include a reference to section 122 in your response to him.
J.A. Szeszycki
for Section Chief
Personal and General Section
Business and General Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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