24 November 1999 External T.I. 9919595 - RRSP INCOME FIRST NATION MEMBERS

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: Will withdrawals from an RRSP by a First Nation member retain its tax-free status?

Position: Question of fact.

Reasons: If the payments from the RRSP relate to contributions in respect of income that was exempt from tax, then such payments will usually be exempt from tax. If only a portion of the payments relate to such tax-exempt contributed income, then the payments will be prorated.

XXXXXXXXXX 991959
M. P. Sarazin
Attention: XXXXXXXXXX

November 24, 1999

Dear Sirs:

Re: RRSP and First Nation Member

This is in reply to your letter dated July 16, 1999, wherein you requested our views regarding the taxation of amounts received by a First Nation member from his or her registered retirement savings plan ("RRSP") or registered retirement income fund ("RRIF").

Comments

We have assumed for purposes of our comments that the First Nation members are status Indians as defined in the Indian Act. Subsection 2(1) of the Indian Act defines an "Indian" as "a person who pursuant to this Act is registered as an Indian or is entitled to be registered as an Indian". Sections 6 and 7 of the Indian Act describe persons who are and who are not entitled to be registered as Indians.

In light of the decision of the Supreme Court of Canada in Glenn Williams v. Her Majesty the Queen (92 DTC 6320), Canada Customs and Revenue Agency (the "Agency") has concluded that when payments from an RRSP relate to contributed income that was exempt from tax, the payments will usually be exempt from tax. Likewise, when payments from a RRIF relate to amounts transferred from another registered plan that were originally exempt income contributions, the payments from the RRIF will usually be exempt from tax. If only a portion of the payments relate to contributed income that was exempt, then the exemption will be prorated. This position is consistent with our treatment of registered pension plan benefits which can be found in the Indian Act Exemption for Employment Income Guidelines issued in June, 1994. The determination of whether a particular payment would be exempt from tax is a question of fact.

We note that an Indian may be subject to taxes under Part X.1 of the Income Tax Act (the "Act") in respect of over-contributions to deferred income plans. In order to make this determination, we would have to compute the Indian's "cumulative excess amount" within the meaning assigned by subsection 204.2(1.1) of the Act. As noted in paragraph 30 of Interpretation Bulletin IT-124R6, the cumulative excess amount is generally equal to the amount, if any, by which the taxpayer's undeducted RRSP premiums exceeds the aggregate of the taxpayer's RRSP deduction limit and $2,000 (IT-124R6 states $8,000 because it does not reflect amendments to the Act passed subsequent to its printing). A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", within the meaning assigned by subsection 146(1) of the Act. In determining an Indian's earned income, we have concluded that, in the absence of a specific provision which includes paragraph 81(1)(a) exempt income in such calculation, income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not to be included in the calculation of the Indian's earned income. [Note, the Act is generally specific when the intention is to include income that is exempt pursuant to paragraph 81(1)(a) of the Act in a particular calculation. The definition of "earned income" in subsection 63(3) of the Act and the definition of "compensation" in subsection 147.1(1) of the Act supports our position.] Consequently, unless the Indian has earned income, he or she will not have an RRSP deduction limit and, therefore, amounts in excess of the $2000 margin contributed to the RRSP by the Indian will be subjected to taxes under Part X.1 of the Act. We note that 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 in that case.

Where an Indian withdraws the non-deductible RRSP contributions that relate to tax-exempt income, the withdrawals would be tax-exempt under Part I of the Act. However, the Indian may be liable for any taxes owing under Part X.1 of the Act. Pursuant to subsection 204.3(1) of the Act, a Part X.1 return (T1-OVP) is required to be filed with the Agency and the tax paid within 90 days after the end of the year in which a cumulative excess amount exists. However, the Minister may waive the tax pursuant to subsection 204.1(4) of the Act, and the late-filing penalties and interest may be waived in accordance with subsection 220(3.1) of the Act. The filing of the return (for years after 1991) may be waived under subsection 220(2.1) of the Act. The determination of whether these relieving provisions should apply will only be done on a case-by-case basis. Affected individuals should contact their local tax services office for more information in this regard.

In order that Part X.1 taxes be waived, paragraph 204.1(4)(b) of the Act requires that the excess be withdrawn from the RRSP. As noted above, to the extent that the amount withdrawn from the RRSP is related to tax-exempt income, the withdrawal will also be tax-exempt and will not be included in income.

Under subsection 153(1) of the Act, every person making a payment out of an RRSP or a RRIF is required to withhold taxes. In the case where recipients are status Indians whose income may be exempt from income tax, including partially exempt, if the payor wishes to be relieved from the obligation to withhold taxes, we suggest that the payor request individual waivers under the provisions of subsection 153(1.1) of the Act. In addition, we have confirmed with the Client Services Directorate that the Agency will issue general waivers in respect of identifiable groups. Queries with respect to this matter should be referred to the Assistant Director, Client Services Division, of your local tax services office.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate