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 émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Can RPP receipt be taxed where a deduction was not claimed on contribution

Position:

Yes

Reasons:

TPs argument that 4(4) will prevent the taxation of the amount is not accepted

								May 24, 1996

Toronto Centre TSO Headquarters
Verification & Enforcement Division (613) 957-8953
Section 444-12, 438/7
Attention: Naomi Tsuji
7-960582

XXXXXXXXXX

This is in reply to your memorandum of February 1, 1996, wherein you requested our comments on the submission by XXXXXXXXXX with respect to the deduction from income of excess contributions to a registered pension plan (the "RPP") and the inclusion in income of amounts on their withdrawal from the RPP.

Background

The facts of the case can briefly be stated as follows:

Employer contributions amounting to $XXXXXXXXXX (the "excess contributions") were made to the RPP in the years 1991 through 1994. These were claimed as deductions from income by the employers of the members of the RPP.

At all relevant times throughout the years 1991 through 1994, the RPP was in a surplus position. Therefore, in accordance with the Income Tax Act (the "Act"), contributions to the plan should not have been made and deductions from income should not have been claimed.

In 1995 the amount of $XXXXXXXXXX, representing the excess contributions and certain earnings thereon, was withdrawn from the RPP.

Your office has proposed to disallow the deduction of the excess contributions in the years 1991 through 1994 because they were not deductible in accordance with the provisions of subsection 147.2(1) of the Act. You also propose to include the amount withdrawn from the RPP in 1995 as income received from the RPP in accordance with the provisions of paragraph 56(1)(a) of the Act. However, the taxpayers have made representations that these assessments will represent a "double taxation" of the amount, that it was not intended to double tax the amounts under the Act in such circumstances and that the provisions of subsection 4(4) of the Act may have application to prevent it. They have requested that the Department either disallow the deductions in the years 1991 through 1994 and not assess the withdrawal of the excess contributions in 1995 or allow the deductions as claimed and assess the withdrawal of the excess.

Our comments

In our opinion the Act provides for your proposed assessments, that subsection 4(4) of the Act has no application to prevent them, and that the courts have determined that the assessment of amounts received out of a pension are taxable even though an element of double taxation may be inherent in such situations.

Court Decisions

As noted by you, several cases have upheld the taxation of amounts where a deduction was not taken or allowed while an income inclusion was required. These cases include:

Vestey v. IRC (1978) 2 W.L.R. 136 at 155;

Rea Estate v. M.N.R. 61 DTC 90;

Brown v. The Queen 79 DTC 5421 (FCTD);

Perrault v. The Queen 78 DTC 6272 (FCA); and

Kurisko 88 DTC 6434; 90 DTC 6376 FCA).

The second and last of these cases deal specifically with pension income inclusions under the Act.

Subsection 4(4) of the Act

XXXXXXXXXX argues that subsection 4(4) of the Act has application to prevent the inclusion in income of the amount withdrawn from the RPP, to the extent the amount of the deductions are not allowed as a deduction from income. We are not in agreement with this position.

XXXXXXXXXX begins its argument through an examination of The Queen v. Langille (1975) DTC 280 and (1977) CTC 144 (FCTD). This appears to be the only case that makes reference to subsection 4(4) of the Act in this context.

In Langille, the taxpayer purchased an annuity and registered it as an RRSP. However, the taxpayer did not deduct any of the amounts paid for the annuity in computing income and the court held that the taxpayer was not taxable on the portion of RRSP withdrawals that represented a return of the undeducted premiums paid for the annuity.

On appeal, the Federal Court agreed with the reasoning of the Tax Review Board. This reasoning was set out on page 282 of the initial case as follows:

"In my opinion neither paragraph 56(1)(h) nor subsection 146(5) of the Income Tax Act are applicable to the facts of this case, because what the appellant in fact did was to deposit monies on which he already had paid the required tax into a savings account of sort. ... Such a deposit, in my opinion, constitutes ordinary savings, and does not come within the meaning and intent of a Registered Retirement Savings Plan .... unless the premiums are deducted as and when paid. The refund of such capital is not income, and should not be made subject to the regulations governing Registered Retirement Savings Plans.

Whenever tax free capital is refunded to a taxpayer, from whatever source, it cannot, in my view, by any legal principle or by any provision of the Income Tax Act be taxed a second time..."

The boards reasoning in this case was given with respect to the facts of the case and the provisions of the Act as they applied at that time. However the provisions of the Act have changed and the reasoning may no longer be valid.

First, in the years in question, (1961 through 1972) income from an annuity was taxable only on receipt. Accordingly the court asserted that the only benefit of investing in an RRSP registered annuity was to obtain the deduction of the premiums. Since there was no requirement to report income from an annuity on an accrual basis, the court did not consider the benefits of tax sheltering such income. This is not the case with respect to income from an annuity as the Act reads today. Now, income from an annuity must be reported annually on an accrual basis. Therefore, significant benefits can be achieved by contributing to an annuity registered as an RRSP.

Second, the court determined that deductions of RRSP premiums had to be claimed when the contributions were made in order for the annuity to be an RRSP. Again, this is not the case today since the deduction of contributions can now be deferred for several years.

When the Langille case was appealed the federal court agreed with the Board's reasoning in its finding for the taxpayer. The federal court then provided additional reasons why it felt the Board's decision was correct. In particular, the court stated that "there is a presumption against double taxation" and that "This same principal is set out in section 4(4) of the Act ..." Therefore, unless there is a clear intention to tax an amount twice, it should be avoided.

The court then proceeded to show that the wording of subsection 146(8) was so ambiguous that it was impossible to ascertain that there was a clear intention to double tax and that it was therefore appropriate to allow the taxpayer to escape such taxation.¹

In our opinion there is no such ambiguity in the wording of paragraph 56(1)(a) of the Act so the decision in Langille is of no assistance to the taxpayers in the present case.

In considering the application of subsection 4(4) "double taxation" is frequently considered to occur where a deduction was not taken that would normally offset an income inclusion as occurred in the Langille case. Accordingly, the reference is often made to the receipt or withdrawal of "tax paid" dollars. In our opinion, while this result may reflect a form of double taxation, we are not convinced it is the form that was envisioned in the drafting of subsection 4(4). In our opinion that provision must be read with specific reference to the words "as the case may be" used therein. Abbreviated, the subsection reads:

"... no provision ... shall be read ... to require the inclusion or to permit the deduction ... from a particular source ... of any amount ... (that) has been ... included or deducted as the case may be, in computing income..."

In our opinion this means that the provision is aimed at providing relief in situations where two provisions of the Act may equally apply to require the inclusion of an amount in income or permit the deduction of an amount from income. It does not address the situation where a deduction is not claimed with respect to an amount that must subsequently be in included in income. This is also clear from the technical notes to new subsection 248(28) of the Act which will replace subsection 4(4) of the Act. The notes state:

"Subsection 4(4) generally provides that unless a contrary intention is evident, no provision should be interpreted to require an amount to be included or deducted more than once in computing a taxpayer's income. .... This subsection (248(28)) is broader in scope ... and is intended to prevent double inclusions or double deductions of an amount in computing income..."

In rebuttal, it is arguable that the inclusion of an undeducted amount represents a double taxation of an amount that was previously included in income. To explain, if a corporation earns income from its business activities and then transfers that income to an RPP, it is arguable that the amount will retain its identity on withdrawal from the RPP as being income from the same source. Therefore double taxation will occur if a deduction is not claimed and it is taxed on receipt from the RPP.

This is the basic argument made by XXXXXXXXXX at page 12 of their submission. They argue that the source of the contributions made each year is the income earned by the employer in that year, and that the deduction for tax purposes is to eliminate the taxation of that source until the income is subsequently received out of the RPP.² In essence, they are arguing that if an amount is contributed to an RPP out of income for the year from a business or out of the retained earnings of the business and it is not deducted in computing taxable income, then subsection 4(4) of the Act will apply to deny the taxation of the amount when it is paid out of the RPP. However they concede that if the amount is deducted in computing taxable income, subsection 4(4) of the Act should not have application because the amount would not be received from the same source when it is repaid from the RPP.

We do not accept the argument that the deduction of an amount can change the source of the amount. It is our position that the amount of the contribution to the RPP is from the contributor's normal business operations while the amount of the receipt from the RPP is pension income. Therefore subsection 4(4) of the Act can not apply. (See Abrahamson v MNR 91 DTC 213, for a discussion of the treatment of pension income transferred to a trust).

We further note that the provisions of the Act pertaining to RRSPs clearly tax all benefits received from an RRSP but do not provide for the deduction of all contributions either before or after pension reform and, in particular, after considering the indefinite carryforward allowed for RRSP contributions. Additionally paragraphs 60(a) of the Act pertaining to capital elements of annuities, paragraph 60(t) of the Act on RCAs and subsection 146(8.2) of the Act in respect of RRSPs would be redundant if XXXXXXXXXX argument were correct.

To summarize, in our opinion subsection 4(4) of the Act is not intended and should not be applied to settle situations where there is ambiguity in the law. Adequate well established rules for the interpretation of the law exist to settle such situations. Subsection 4(4) is intended to provide a rule in cases where more than one provision of the Act requires an inclusion of an amount in income or more than one provision provides for the deduction of an amount from income. In these cases subsection 4(4) will apply to ensure only one of those provisions should apply.

In the present case it is our position that the source of the income assessable under 56(1)(a) is not the same as the source of the income from which the RPP contributions were made. Therefore, subsection 4(4) will not apply to limit the taxation of the amount under 56(1)(a) of the Act. Furthermore the cases noted on page 2 above, tend to support our position. Therefore, we are not prepared to accept the employers' argument to the contrary.

The Regulatory Climate

It is not within our mandate to determine whether administrative relief in the circumstances of this case should be provided. However, we can state that, in our opinion, the wording of paragraph 56(1)(a) clearly provides for the inclusion in income of all amounts received out of an RPP as described while subsection 147.2(1) prevents the deduction of the contributions as described.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

^1. It is also arguable that the FCTD did not apply the provisions of subsection 4(4) of the Act in arriving at the support for the lower court decision. The court only used the subsection to demonstrate that there is a presumption against double taxation in the Act. Once this was established the court analyzed the provisions of subsection 146(8) and the definition of "benefits" and "premiums" and determined that the sections were ambiguous. Once having determined this the court did not need to rely on subsection 4(4) of the Act. The court merely had to resolve the ambiguity in favour of the taxpayer in accordance with the normal rules for statutory interpretation.

As Price Waterhouse notes in their submission, subsequent amendments of the RRSP provisions may have resulted from this case to remove the ambiguity that the court identified. However, it is not clear what the changes may mean in respect of subsection 4(4).

^2. This argument presumes that the contribution to the RPP is made from income. However, this may not be a valid presumption if the contribution is made from prior years retained earnings.