3 July 1997 Internal T.I. 9706767 - TRANSFER RPP TO RRSP EXCESS AMOUNT

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:

The application of 147.3(13.1) when 147.3(10) was not applied to deem an amount paid to the taxpayer.

Position:

The deduction determined under subsection 147.3(13.1) would not be available when 147.3(10) was not applied to deem an amount paid to the taxpayer.

Reasons:

Clause 147.3(13.1)(b)(i)(B) refers to an amount included in income pursuant to paragraph 56(1)(a) which would result if there was a deemed payment under paragraph 147.3(10)(a).

			July 3, 1997

	XXXXXXXXXX TSO	Headquarters
	XXXXXXXXXX	Franklyn S. Gillman
	Director				952-9853

	Attention:  XXXXXXXXXX
                      Audit Division
	            XXXXXXXXXX	970676

Subsection 147.3(13.1) of the Income Tax Act (the "Act")

This is in reply to your memorandum of March 5, 1997 wherein you requested our opinion as to the application of subsection 147.3(13.1) of the Act as it would apply to a specific fact scenario which you provided.

Our understanding of the facts is from the above mentioned memorandum and various telephone conversations with your office (Gillman/XXXXXXXXXX) and with the Registered Plans Division (Gillman/Wong) at Head Office.

Facts

A private company was principally owned by XXXXXXXXXX The company had a defined benefit registered pension plan (the "RPP"). As at XXXXXXXXXX were the only remaining members of the RPP.

The Brothers had engaged professional accountants for advice in conducting the affairs of the company and for preparing their income tax returns (XXXXXXXXXX).

The company was sold as of XXXXXXXXXX and it was the intent of the Brothers to wind up and deregister the RPP. In accordance with the RPP documentation, the company had an actuary produce an actuarial report (the "Report") regarding the termination of the RPP at a cost of approximately $XXXXXXXXXX. The Report dated XXXXXXXXXX contained information regarding the wind up of the RPP and indicated the amounts (the "Prescribed Amount") that were permitted to be transferred to each of the Brothers' registered retirement savings plan ("RRSP"). These amounts were calculated in accordance with section 8517 of the Income Tax Regulations.

The Brothers directed the RPP trustee to transfer from the RPP, the entire market value of the assets in their account to each of their respective RRSPs. This transfer was effected on XXXXXXXXXX and no taxes were withheld since it was a direct transfer from the RPP to an RRSP. No amount was included in the income of the Brothers as a result of the transfer even though paragraph 147.3(10)(a) deemed the Excess Amounts (see below) to have been paid to the Brothers and it should have been included in income pursuant to paragraph 56(1)(a). Registered Plans Division revoked the registration of the RPP on XXXXXXXXXX. The following indicates the amounts that were transferred into each of the Brothers' RRSP, the Prescribed Amount that pertains to each of them and the difference between the two amounts (the "Excess Amount"):

XXXXXXXXXX

XXXXXXXXXX advised us that she was informed that the Brothers disregarded the Report because they felt it was only paper work and was insignificant and not important.

To date the Excess Amounts are still in the Brother's RRSPs. It is your opinion that the 1989 taxation year is statute barred. It is your intention to invoke a 1% penalty tax pursuant to Part X.1 for the years 1990 to 1995. You also informed us that a T1-OVP return has never been filed and that it is the intention of the Brothers to each file one for the 1996 taxation year.

The Brother's intend to withdraw the Excess Amounts from their respective RRSP so that their liability to pay Part X.1 tax will be minimized. These amounts will be benefits from an RRSP and are required to be included in income pursuant to subsection 146(8).

Each brother has engaged a tax attorney to represent them in their dealings with the Department in this matter and one of the attorneys is requesting a deduction from income in the year of withdrawing the Excess Amount pursuant to subsection 147.3(13.1).

Issue

You requested our opinion as to whether the Brothers are entitled to tax relief pursuant to subsection 147.3(13.1) when in fact, income tax was not paid and will not be paid on that amount in 1989 pursuant to subsection 147.3(10), since that particular taxation year is statute barred. You informed us that if in the year the Excess Amounts are withdrawn, an offsetting deduction is permitted pursuant to subsection 147.3(13.1), the Brothers will be avoiding all taxes on the Excess Amounts being withdrawn from their RRSPs and income tax will never be paid on those amounts.

Rulings Opinion

Subsection 147.3(10) provides rules for transfers from an RPP to an RRSP, or another registered plan, when the transfer is not in accordance with subsections 147.3(1) - 147.3(7). It provides that when such a transfer occurs, the amount not in accordance with subsections 147.3(1) - 147.3(7) is deemed to have been paid from the RPP directly to the individual and the individual is deemed to have paid the amount as a contribution or premium to the receiving plan. This results in the amount being included in the income of the individual and the application of the rules with respect to the deductibility of contributions to an RRSP or RPP and Part X.1 tax should there be an excess contribution to the RRSP. In this situation subsection 147.3(10) should have applied to the Excess Amounts referred to above.

Subsection 147.3(13.1) was introduced to avoid double taxation of the excess amount that was originally taxed as a superannuation or pension benefit by virtue of paragraphs 147.3(10)(a) and 56(1)(a). Where the excess amount is withdrawn from the transferee plan it will be included in income again, and subsection 147.3(13.1) was intended to provide a deduction for this amount.

With respect to RRSPs, the application of subsection 147.3(13.1) only permits the lesser of certain amounts as a deduction from income. These amounts are:

the amount withdrawn and included in income pursuant to subsection 146(8) in computing the individual's income, and

The lesser of the following three amounts:

the transferred amount;

the amount included in income as a result of the transfer; and

the amount deemed as a result of the transfer to be paid as a premium to the RRSP.

When any one of the amounts is nil, no deduction shall be permitted pursuant to 147.3(13.1).

With regards to your particular situation, the Brothers had exceeded the transfer limits of paragraph 147.3(4)(c) at the time the RPP was terminated. However the Excess Amount was never included in income pursuant to subsection 147.3(10). The question at issue is, when the Excess Amount is taken out of the RRSP, would subsection 147.3(13.1) permit a deduction?

The amount included in income as a result of the transfer is referred to in clause 147.3(13.1)(b)(i)(B) and in this case is nil because the Excess Amount was never included in the income of either of the Brothers. It is our opinion that this particular clause refers to an amount included in income pursuant to paragraph 56(1)(a) which would result if there was a deemed payment by the RPP to each of the Brothers under paragraph 147.3(10)(a). It is our view the wording of the provision supports this position. Subparagraph 147.3(13.1)(b)(i) states "... all amounts each of which is an amount that was ...", then it goes on to refer in clause A, to the transferred amount, in clause B, to the amount included in income, and in clause C, to the amount deemed to be a premium. In our opinion, the same amount must meet each of these criteria and it can only meet the test in clause B if it is included in income by virtue of the transfer. It would be pointless to consider clause B referring to the amount included in income as a result of the withdrawal from the RRSP. This RRSP withdrawal is already included in the equation by virtue of paragraph 147.3(13.1)(a) and there is no need to include it again in paragraph 147.3(13.1)(b). We have discussed this application of the subparagraph with officials from the Minister of Finance and they have confirmed that this was the intent.

It is therefore our opinion that the deduction determined under subsection 147.3(13.1) for either XXXXXXXXXX is nil.

Should you have any further questions with any of the above comments or for any other reason, please contact Frank Gillman at 613 952-9853.

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