21 April 1997 External T.I. 9705055 - DAMAGES PAID TO RPP

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:

What are tax consequences re amount proposed to be paid by employer to money purchase RPP (or transferee RRSPs or RRIFs of the money purchase RPP) in respect of damages suffered by the RPP caused by the employer's choice of investment.

Position:

1)No employment income inclusion to employees;
2)not a contribution to RPP, RRSP or RRIF by either employee or employer (which means not deductible and not subject to P.A. limits, RRSP over-contribution tax or prohibition against RRIF contributions);

3) deductible to employer under section 9.

Reasons:

Damages in respect of bad investment suffered by RPP members are not paid by virtue of the employment relationship and should not be subject to contribution limits. Payment by employer is an expense of doing business.

XXXXXXXXXX 970505

Attention: XXXXXXXXXX

April 21, 1997

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letters of February 21, 1997 and March 3, 1997, and your letter received April 4, 1997, in which you request an advance income tax ruling on behalf of the above-named client, and further to our telephone conversations of March 17, March 18 and April 10, 1997.

As confirmed in the latest telephone conversation (Spice/XXXXXXXXXX) we are unable to provide the advance rulings as requested since we have determined that you have already undertaken to complete the transactions described in your submission. As stated in paragraph 7 of Information Circular 70-6R3, advance rulings are not issued on a series of transactions that are significantly advanced. We may provide, however, the following opinions which are general in nature and may be relevant to your situation but which are not binding on the Department.

ATR-24 provides the Department's interpretation concerning the tax consequences of a payment of damages to a registered retirement savings plan ("RRSP"). Where an investment management company has caused a loss to an RRSP and damages are paid pursuant to an out-of-court settlement or court order, the amount is not brought into the annuitant's income in the year it is paid to the RRSP trust nor is it included in the calculation of the amount subject to Part X.1 tax under the Income Tax Act (the "Act").

The interpretation in ATR-24 is equally applicable to other registered deferred income plans. Thus where the damages are paid into a registered pension plan, deferred profit sharing plan or registered retirement income fund, the amount is neither brought into the plan member's or annuitant's (hereinafter referred to as "plan member") income in the year the damages are paid to the registered plan nor does the payment of such an amount constitute a contribution for purposes of the pension credit calculation (Part LXXXIII of the Income Tax Regulations) or as prohibited under paragraph 146.3(2)(f) of the Act.

Furthermore, in some circumstances where the registered plan which suffered the losses is no longer in existence or the plan member's RRSP has matured or been converted to a RRIF, damages may be paid into the plan member's new or successor registered plan with the same tax consequences as damages could have been paid to the original plan.

Finally, where damages in respect of a breach of contract or tort are paid by the employer to compensate for investment losses caused by the employer as administrator of a registered plan which has been established for a group of employees, such damages paid by the employer to the employees' accounts within the registered pension plan or deferred profit sharing plan or to the individual RRSPs or RRIFs are not considered employment income to the employees.

In these circumstances neither the employer nor the employee are considered to have made a contribution to the plan as a consequence of the payment of the damages and thus there is no contribution deduction available. The employer is entitled, however, to a deduction from business income pursuant to section 9 of the Act with respect to damages paid to the registered plan in the year. And if the employer is entitled to recover any amounts as an overpayment of damages where the estimated losses are more than the actual damages, such a recovery is brought into the employer's income in the year received.

We trust our comments will be of assistance to you. Your deposit will be returned to you under separate cover.

Yours truly,

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