17 September 1996 External T.I. 9607685 - TAX TREATMENT OF RRSPS OF STATUS INDIANS

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:

1.Request for information regarding the tax treatment of RRSPs of status Indians.

2.Does employment income earned by a status Indian off reserve automatically qualify as "earned income" for RRSP purposes?

Position TAKEN:

1.General information provided. That is, when payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated.

2.No.

Reasons FOR POSITION TAKEN:

1.Position taken in other files and based on Williams.

2.A contribution to an RRSP cannot be deducted unless there is "earned income" as defined in subsection 146(1). Income that is exempt from tax does not generate "earned income", as it is excluded from income by virtue of paragraph 81(1)(a). Consequently, where a contribution to an RRSP relates to income that is exempt from tax, the contribution cannot be deducted.

Where a portion of the employment income is earned on reserve, Guideline 1 or 3 may apply, depending on the circumstances, to determine whether the off reserve portion is also exempt. On the other hand, where Guideline 2 or 4 applies, the employment income is exempt, regardless of whether it is earned on or off reserve.

									5-960768
XXXXXXXXXX							M. Azzi

Attention: XXXXXXXXXX

September 17, 1996

Dear Madam:

Re: RRSPs of Status Indians

This is in reply to your letter of February 28, 1996, requesting information on the tax treatment RRSPs of status Indians. You indicate that you have been advised that Indians working off reserves can contribute to an RRSP, as the income they earn is not tax exempt.

Our Comments

The decision of the Supreme Court of Canada in Williams (92 DTC 6320, (1992) 1 CTC 225), has required the Department to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act. One general direction provided in Williams was that "an overly rigid test which identified one or two factors as having controlling force...would be open to manipulation and abuse". The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

Based on the guidance provided in Williams, the Department has reviewed its position on RRSPs. As a result of our review, we are of the view that when payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated. This position is the same as the position for registered pension plan benefits, unemployment insurance benefits and Canada Pension Plan payments reflected in the Indian Act Exemption for Employment Income Guidelines (the "Guidelines") issued in June, 1994. We have enclosed a copy of the Guidelines for your information.

However, a contribution to an RRSP cannot be deducted unless there is "earned income" as defined in subsection 146(1) of the Income Tax Act (the "Act"). Income that is exempt from tax does not generate "earned income", as it is excluded from income by virtue of paragraph 81(1)(a) of the Act. Consequently, where a contribution to an RRSP relates to income that is exempt from tax, the contribution cannot be deducted. Nonetheless, it is likely that such contributions may have been made in the past. In addition, formerly when a remission order applied to remit a status Indian's taxes otherwise payable on employment income, he or she would technically have had "earned income" and would have been entitled to contribute to an RRSP. Our revised position will exempt payments from an RRSP in both these instances since the contributions would have related to tax-exempt income or income that was accorded tax-exempt treatment by a remission order.

In order to determine whether employment income is exempt from tax by virtue of the Indian Act, reference should be made to the Guidelines. The Department developed the Guidelines based on the guidance provided in Williams and after receiving representations from interested Indian groups and individuals. The Guidelines incorporate the various connecting factors that describe the employment situations covered by the Indian Act.

Under the Guidelines, all employment income earned by a status Indian for employment duties performed on a reserve is exempt. However, employment income related to duties performed off reserve may also be exempt in certain circumstances and, consequently, not qualify as "earned income" for RRSP purposes. For example, where a portion of the employment income is earned on reserve, Guideline 1 or 3 may apply, depending on the circumstances, to determine whether the off reserve portion is also exempt. On the other hand, where Guideline 2 or 4 applies, the employment income is exempt, regardless of whether it is earned on or off reserve.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch