10 May 2010 External T.I. 2009-0321001E5 - RRSP Over-contribution

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.

Principal Issues: What are the tax consequences arising from a withdrawal of an over-contribution to a spousal RRSP?

Position: Provided general comments.

Reasons: Discussed the income inclusion under subsection 146(8), the attribution rules in subsection 146(8.3), the deduction available under subsection 146(8.2), and the penalty tax under subsection 204.2(1.1).

XXXXXXXXXX 2009-032100
S. Bernards
May 10, 2010

Dear XXXXXXXXXX :		

RE: Withdrawal of over-contributions to a spousal RRSP

This is in response to your email that we received on May 4, 2009 concerning a withdrawal of over-contributions made to a spousal registered retirement savings plan ("RRSP").

You indicated that in 2008 your husband over-contributed to an RRSP under which you are the annuitant. The funds were used to acquire mutual funds. Your question is whether you and your husband are able to withdraw the excess contribution and transfer the withdrawal in kind to a joint non-registered investment account without any tax implications.

The particular situation outlined in your email appears to relate to a factual one, involving one or more specific taxpayers. It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are, however, prepared to provide the following general comments.

Our Comments

As noted in Guide T4040, RRSPs and Other Registered Plans for Retirement, if a taxpayer did not deduct all the contributions made by the taxpayer after 1990 to RRSPs under which the taxpayer or the taxpayer's spouse or common-law partner ("CLP") is the annuitant, generally, the taxpayer may either keep the unused contributions in the plan and claim a deduction for them in a later year (provided sufficient RRSP contribution room is available) or withdraw the unused contributions out of the plan.

If the taxpayer chooses to withdraw the unused contributions, subsection 146(8.2) of the Income Tax Act (the "Act") provides that, subject to certain conditions, the taxpayer may claim a deduction for the withdrawal from the RRSP. We note that only the taxpayer who made the over-contribution can claim the deduction under subsection 146(8.2) of the Act, even though the over-contribution may have been made to the RRSP of the taxpayer, the taxpayer's spouse or CLP. For more information on the conditions that must be met in order to qualify for the deduction, please refer to Chapter 2 under the heading "Withdrawing the unused contributions" in Guide T4040.

One of the conditions in subsection 146(8.2) of the Act is that the withdrawal must be included in the contributor taxpayer's income for the year. An RRSP that has not matured can only provide for payment of benefits that are a refund of premiums (not applicable to the situation described by you) or a payment to the annuitant of the plan. However, an RRSP is permitted to make a payment to a taxpayer (e.g., the contributor taxpayer) where the amount is paid to reduce the amount of tax otherwise payable by the taxpayer under Part X.1 of the Act. In general terms, Part X.1 tax is payable where the taxpayer's unused contributions from prior years and his or her unused contributions from the current calendar year are more than the taxpayer's RRSP deduction limit plus $2,000. For further information on the Part X.1 tax, see Chapter 2 under the heading "Tax on RRSP excess contributions" in Guide T4040.

Where the payment from the spousal or CLP plan is to the contributor taxpayer and the payment is included in the income of the recipient (i.e., contributor taxpayer) pursuant to subsection 146(8) of the Act, the condition in subsection 146(8.2) of the Act as discussed above would be met.

If the over-contribution is paid from the spousal or CLP plan to the annuitant rather than the contributor taxpayer, it will be included in the income of the annuitant. However, if the contributor taxpayer has contributed to any spousal or CLP plans of the annuitant in the year in which the payment is paid from the RRSP, or either of the two immediately preceding years, subsection 146(8.3) of the Act will generally apply to attribute an amount to income of the contributor taxpayer. Therefore, if the payment is made to the plan annuitant rather than to the contributor taxpayer, within the time period to which the subsection 146(8.3) attribution rules apply, then a deduction pursuant to subsection 146(8.2) of the Act may be available to the contributor taxpayer.

We note that where a taxpayer has claimed a deduction for a withdrawal of unused contributions under subsection 146(8.2) of the Act, the contributions corresponding to the withdrawal are deemed, for certain purposes, not to have been contributions made by the taxpayer to an RRSP. This deeming rule ensures that the taxpayer cannot then claim an RRSP deduction for any year for the same contributions.

In your email, you have provided very limited information on your situation. It is not clear to us the extent of the over-contribution made by your husband or whether your husband is subject to the Part X.1 tax on excess RRSP contributions. If, in fact, an over-contribution was made by your husband in 2008 to a spousal RRSP and the over-contribution is withdrawn from the spousal plan and paid to you, as the annuitant under the plan, in 2008, 2009 or 2010, it will be attributed to the income of your husband pursuant to subsection 146(8.3) of the Act. To the extent that Part X.1 tax is payable on the over-contribution, such amount may generally be paid out of the spousal plan to your husband to be included in your husband's income pursuant to subsection 146(8) of the Act. As discussed above, an offsetting deduction for the income inclusion may be available to your husband, as the contributor taxpayer, provided that the withdrawal is included in your husband's income and the other conditions under subsection 146(8.2) of the Act are satisfied.

You mentioned withdrawing the excess contribution from your RRSP and transferring the withdrawal in kind to a joint non-registered investment account. Unlike a non-registered account, an RRSP trust is considered to be a separate and distinct entity for income tax purposes. As a result, the withdrawal from the RRSP trust will be considered a disposition of the securities by the RRSP trust and an acquisition of the securities by you or your husband, depending on if the withdrawal is made to you or to your husband. The taxable RRSP benefit is equal to the fair market value of the securities at the time of the withdrawal and such amount becomes the cost to the recipient of the securities. The financial institution that administers the RRSP trust will be required to withhold income tax on the amount of the RRSP withdrawal.

We trust our comments are of assistance. However, as stated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the CRA in respect of any particular situation.

Yours truly,

Jenie Leigh
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch