3 March 1997 External T.I. 9636815 - WITHHOLDING REQUIREMENTS

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:

whether 227(5) and (5.1) may be applied in particular situation involving a agent for a trust company when the trust company is the trustee of mutual fund trust. A holder of a mutual fund unit declares bankruptcy, and the agent for trust co. is asked to redeem the units of the bankrupt and pay to the proceeds to the trustee in bankruptcy

Position:

227(5) and (5.1) may apply so that the client, the trust company and the trustee in bankruptcy are jointly and severally liable for amounts required to be withheld and other amounts payable, such as penalties and interest.

Reasons:

	                            	963681
XXXXXXXXXX	                                Sandra Short

Attention: XXXXXXXXXX

March 3, 1997

Dear Sirs:

Re: Your file XXXXXXXXXX

This is in reply to your letter of October 29, 1996, which queries withholding requirements in the situation described below. We apologize for the delay in replying to you.

A client is an agent for a Canadian trust company. The trust company is the trustee of a mutual fund trust. When the holder of a mutual fund unit declares bankruptcy, the client may receive a notice from the holder's trustee in Bankruptcy requesting that the mutual fund units of the bankrupt individual be redeemed and the proceeds paid to the trustee in bankruptcy. The mutual fund units are often held within a Registered Retirement Savings Plan (RRSP). The client's practice has been to process a request for deregistration of the RRSP and to remit redemption proceeds to the trustee in bankruptcy. You have queried whether the client is obligated to withhold and remit income tax on such payments to the trustee in bankruptcy and whether the client is subject to any liabilities or penalties if the trustee in bankruptcy ultimately also fails to withhold and remit the appropriate amount of income tax.

Our Comments

It is our opinion that subsections 227(5) and (5.1) of the Income Tax Act (the Act) may be applied to the situation described above, such that the client, the trust company and the trustee in bankruptcy are jointly and severally liable for amounts required to be withheld and other amounts payable, such as penalties and interest, if the payer (the trustee of the RRSP or RRSP administrator or operator as the case may be) fails to withhold. An explanation follows.

Paragraph 153(1)(l) of the Income Tax Act requires a person paying an amount out of or under an RRSP to withhold a prescribed amount of Part I tax. Section 101 of the Regulations requires that every person making a payment described in subsection 153(1) of the Act to deduct or withhold such amount, if any, as determined by Part I of the Regulations. Subsection 103(4) of the Regulations contains the provisions for withholding on "lump sum payments" which are defined in subsection 103(6) of the Regulations (this definition would include a lump sum amount received upon deregistration of an RRSP). Prescribed withholdings are required to be made by the "employer," defined in subsection 100(1) of the Regulations - for purposes of Part I of the Regulations as well as Schedule I - to be any person paying remuneration (paragraph (i) of the definition of "remuneration" states that remuneration includes certain payments out of an RRSP). Therefore, the trustee of an RRSP (or plan administrator or operator as the case may be) is normally required to make income tax deductions from lump-sum payments made to residents.

Upon the transfer of title of a bankrupt's RRSP to a trustee under the Bankruptcy Act, the trustee in bankruptcy is empowered to exercise powers in or over or in respect of the plan (including its deregistration) as might have been exercised by the bankrupt for his or her own benefit. When the trustee's duties towards the creditors of the bankrupt oblige the deregistering of an RRSP, the plan operator or administrator or trustee is required to withhold an appropriate amount of income tax as discussed in the preceding paragraph. Subsection 227(5) operates to make the trustee of the bankrupt individual also liable for required withholdings, as well as for other amounts that become due if the payor fails to comply with those provisions of the Act listed in paragraph 227(5)(a). The trustee in bankruptcy is a "specified person" under paragraph 227(5.1)(f) of the Act.

The trustee of the bankrupt individual is deemed by paragraph 227(5)(a) to be a person who made the payment and, under paragraph 227(5)(b), is jointly and severally liability with the payer to pay to the Receiver General all amounts payable by the plan operator or administrator, including penalties and other charges which may arise as a result of the failure of the payer to comply with the requirements of paragraph 227(5)(a). The client is also brought into the jurisdiction of subsections 227(5) and (5.1) because of the relationship between the payer and the client.

The information received suggests that the trust company has direct or indirect influence over the RRSP (and the client has the same or similar influence as agent for the trust company) and that the trust company (and or its agent), alone or together with the trustee of the RRSP (or plan administrator or operator), authorizes or otherwise causes a payment under subsection 153(1) of the Act. We make this observation on the basis of the client's ability to accede to and action requests for RRSP deregistrations when a mutual fund unit holder, who holds units in a RRSP, goes bankrupt. As a result, it appears that the client is a specified person described in paragraph 227(5.1)(l), that is, an agent to the trustee of the mutual fund trust (the trustee being the trust company). The trust company also appears to be a specified person under paragraph 227(5.1)(a).

One of the intended results of the rules in subsections 227(5) and 227(5.1) was to secure the payment of source deductions and to share the responsibility for deducting and remitting taxes payable at source with persons with influence to cause or authorize the payment subject to tax at source. In the case at hand, the RRSP administrator or operator or trustee (the payer) has a responsibility under subsection 153(1) of the Act to withhold income tax and the agent for the trust company, as well as the trust company itself, and the trustee in bankruptcy are jointly and severally liable with the payer for the amounts payable under subsection 153(1), because of paragraph 227(5)(a), as well as any penalties and interest due as a result of the failure of the payer to comply with paragraph 227(5)(a) of the Act.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Ray Cousineau, Trust Accounts, 400 Cumberland