15 February 2002 Internal T.I. 2002-0122817 - RRSP OVER-CONTRIBUTIONS

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: Where RRSP over-contributions have been made by an Indian,

a) Will the Canada Customs and Revenue Agency (CCRA) require that a T1-OVP be filed?

b) Will the CCRA allow the over contributions to remain within the RRSP (without penalty) until such time as the First Nation sign its final agreement?

c) Will the CCRA waive any penalty assessment based on the circumstances? If so, are they required to withdraw the funds from the RRSP?

d) Will the withdrawal be exempt since the income was exempt?

e) Can the CCRA provide a letter to the financial institution advising that they are not required to withhold tax on the withdrawal because it is exempt or must a T3012A be completed for each taxpayer?

Position: a) Yes, b) No, c) Withdrawal is required/penalty may be waived, d) Contributions will be exempt but income earned within the RRSP may be taxable.

e) This determination should be made in consultation with IRPPD.

Reasons: a) 204.3(1), b) 204.1(4)(b), c) 204.1(4)(b), d) section 87 of the Indian Act, e) as indicated above.
		February 15, 2002

Ms. Betty Reid 	HEADQUARTERS
	Northern B.C. & Yukon Tax Services	Cornelis Rystenbil, CGA
		Aboriginal Affairs Section
(613) 941-6547

		2002-012281

RRSP Over-Contributions

This letter is in response to your e-mail of February 7, 2002 in which you ask our views on several issues as they relate to Registered Retirement Savings Plan (RRSP) over-contributions made by members of the XXXXXXXXXX First Nation. a)

Our Comments

For purposes of this memorandum, the expression "Indian" has the meaning assigned by subsection 2(1) of the Indian Act.

An Indian may be subject to tax under Part X.1 of the Act in respect of over-contributions to an RRSP. The tax is computed with reference to the Indian's "cumulative excess amount" as defined in 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 excess of the taxpayer's undeducted RRSP premiums over the aggregate of the taxpayer's RRSP deduction limit and $2,000 (the reference to $8,000 in IT-124R6 is due to the fact that IT-124R6 does not reflect amendments to the Act passed subsequent to the printing of the bulletin).

A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", as this expression is defined in subsection 146(1) of the Act. However, income that is exempt from tax pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not included in the calculation of an Indian's earned income. Consequently, unless the Indian has earned income, the Indian will not have an RRSP deduction limit and, therefore, the Indian's cumulative excess amount contributed to the RRSP will be subjected to tax under Part X.1 of the Act.

Question

Will the Canada Customs and Revenue Agency (CCRA) require that a T1-OVP be filed by an Indian?

Response

Yes. Where an Indian is liable for any tax 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 and the tax must be paid within 90 days after the end of the year in which a cumulative excess amount exists.

Question

Will the CCRA allow the over-contributions to remain within the RRSP without being subjected to taxes under Part X.1 of the Act until such time as the First Nation signs its final agreement?

Response

No. There is no provision in the Act that would allow an Indian to over-contribute to his or her RRSP without being subjected to the taxes under Part X.1 of the Act.

Question

Will the CCRA waive any assessment under Part X.1 of the Act based on the circumstances? If so, will the Indian be required to withdraw the over-contribution from the RRSP?

Response

Pursuant to subsection 204.1(4) of the Act, the Minister may waive the Part X.1 taxes where the Minister is satisfied that the cumulative excess amount arose as a consequence of a reasonable error and reasonable steps are taken to eliminate the cumulative excess amount. Consequently, we would require the withdrawal of the cumulative excess amount from the RRSP within a reasonable time period before considering any waiver of taxes under Part X.1 of the Act. We also note that the Minister also has the authority to waive the requirement to file returns (subsection 220(2.1) of the Act) and any late-filing penalties and interest (subsection 220(3.1) of the Act). In our view, these waivers will only be provided where the cumulative excess amount is withdrawn from the Indian's RRSP. The determination of whether these relieving provisions should be applied will only be done on a case-by-case basis and this determination is the responsibility of the local tax services office.

Question

Will the withdrawal from the RRSP be exempt since the income was exempt?

Response

Where an Indian's contributions to an RRSP relate to tax-exempt income, withdrawals of the contributions would continue to be tax-exempt. However, the withdrawal of any investment earnings may be taxed as ordinary investment income. Based on the case of Arnold Recalma v. The Queen (96 DTC 1520, 98 DTC 6238), it would be necessary to determine the location of the RRSP issuer's income generating activity with respect to the RRSP's investments. In our view, unless the RRSP investment income can be identified as exclusively generated on a reserve, the income will not be exempt from tax.

Question

Can the CCRA provide a letter to the financial institution advising that they are not required to withhold tax on the withdrawal because it is exempt or must a T3012A be completed for each taxpayer?

Response

Since withdrawals from the RRSP may consist of tax-exempt contributions and taxable investment income, you should discuss this issue with the Individual Returns and Payment Processing Division (IRPPD) in Headquarters.

We hope our comments will be of assistance.

Mickey Sarazin, CA
for Director
Business and Partnership Division
Income Tax Rulings Directorate
Policy and Legislation Branch

c.c. Edwin Williams

Processing Division
IRPPD

- 3 -