4 December 2001 External T.I. 2001-0110935 - WITHHOLDING ON TRANSFER OF BONUS TO RRSP

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1) Where a bonus is paid early in the calendar year, will the deduction in paragraph 100(3)(c) of the Regulations, from the amount on which tax must be withheld, depend on the current year or previous year RRSP deduction limit?

2) What does CCRA define as "reasonable grounds" for the employer for purposes of applying paragraph 100(3)(c) of the Regulations?

Position:

1) Current year RRSP deduction limit.

2) Written confirmation from the employee that the amount will be deductible, or a copy of the employee's RRSP deduction limit statement.

Reasons:

1) The regulation is unambiguous. Paragraph 100(3)(c) of the Regulations specifically requires that the employer have reasonable grounds to believe that the premium will be deductible for the same taxation year in which the remuneration is paid.

2) The position is noted in the Employers' Guide to Payroll Deductions (Basic Information) 2001-2002

Question 13 Exemption from Withholding on Transfer of Bonus to RRSP

New regulation 100(3) allows for the deduction, from the amount on which deductions at source must be calculated, of an amount that is a premium under a registered retirement savings plan (RRSP). The new regulation replaces the problematic $10,000 threshold of now repealed regulation 100(3.2) with the employee's RRSP deduction limit. Specifically, to the extent that "the employer believes on reasonable grounds" that a premium is deductible in computing the employee's income for the taxation year in which a payment of remuneration is made, the deduction is permitted. TEI welcomes this change, but to be effective the regulation depends on proper administration of the phrase "that the employer believes on reasonable grounds." To clarify the regulation, we submit the following question and recommendation:

A. Assuming a bonus is paid in January 2002, is the relevant RRSP deduction limit the one available for 2001 (as calculated by CCRA based on the year 2000 figures) or the one for 2002 (computed with reference to the 2001 earned income)?

B. TEI recommends that an employer be permitted to establish that it "believes on reasonable grounds" that the deduction is permitted by obtaining a letter from the employee that states the amount of his or her RRSP deduction limit. Please comment on the recommendation.

Agency's Position

A. In accordance with paragraph 100(3)(c) of the Income Tax Regulations, the portion of a payment, or payments, of remuneration, which is deducted or withheld from the gross payment amount, as a premium under an RRSP, will be deducted from the amount of remuneration which is subject to withholding tax, if the employer believes on reasonable grounds that the premium is deductible under paragraph 60(j.1) or subsection 146(5) or (5.1) of the Act for the taxation year in which the payment of remuneration is made.

Where a bonus (other than a retiring allowance) is paid in 2002, the deductibility of the RRSP premium paid out of the bonus will be deductible if it meets the requirements of subsection 146(5) or (5.1) of the Act, as applicable. In either case, the deduction is limited by the employee's RRSP deduction limit for the 2002 taxation year.

B. The CCRA position concerning what would constitute a reasonable basis for the employer may be found in the Employers' Guide to Payroll Deductions (Basic Information) 2001-2002, which is available on the CCRA internet and at the local tax services offices. The section entitled, RRSP contributions you withhold from remuneration you pay an employee, notes that, generally, we consider an employer to have reasonable grounds to believe that the employee can deduct the contribution if it has written confirmation to that effect from the employee, or if the employee has provided a copy of his or her RRSP deduction limit statement from their Notice of Assessment.

Author: Phillip Kohnen
Date: November 20, 2001