In order that the taxpayer’s RRSP could indirectly invest in operating businesses in which he had a management role, he instigated the formation of various unit trusts (the “Income Funds”) which were intended to be mutual fund trusts on the basis that 171 individuals (the “Investors”) - immediate and extended family members, friends, employees, business associates and others - each subscribed approximately $750 for units of each Income Fund. The taxpayer’s RRSP then invested $315 million over time in the Income Funds by subscribing for additional units. The Income Funds invested in underlying LPs carrying on businesses through an intermediate sub trust and master limited partnership.
Smith J sustained assessments of the RRSP under s. 146(10.1) on the basis that the Income Funds did not qualify as mutual fund trusts and, even if they had, their use as “alter egos” for the taxpayer would have been an abuse under GAAR. However, CRA also assessed the taxpayer personally under s. 204.2(1) on the basis that distributions received by the RRSP from the underlying investments represented over-contributions to the RRSP by the taxpayer. In rejecting this assessment, Smith J found that part of the sums at issue were proceeds of disposition realized by the RRSP from the disposition by the RRSP of units of a publicly trade income fund ("FMO"), whic was acknowleged to be a qualified investment, and whose proceeds were used to fund investments in the businesses, i.e., the alleged overcontribution was not derived from the latter. Furthermore, the balance of the distributions were not to be characterized as contributions by him to this RRSP given that "there was no sham or window dressing" (para. 454).
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|Tax Topics - Income Tax Regulations - Regulation 4801 - Paragraph 4801(a) - Subparagraph 4801(a)(i) - Clause 4801(a)(i)(A)||distribution of units that included significant purchases by minors and by adults who did not pay for their own units, was unlawful||755|
|Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)||purported establishment of “alter ego” MFTs through which an RRSP could invest in operating businesses was an abuse engaging GAAR||605|
|Tax Topics - General Concepts - Window Dressing||window-dressing is a deception about intention||312|
|Tax Topics - Income Tax Act - Section 207.1 - Subsection 207.1(1)||non-qualified investments not “included” in annuitant’s income because it was never assessed||346|
|Tax Topics - Income Tax Act - Section 152 - Subsection 152(4)||CRA’s assessing listed taxable RRSPs in a T3GR global return was not of the taxpayer’s (also listed) RRSP /inappropriate reliance in legal opinion on certificate of fact was carelessness||441|
|Tax Topics - Income Tax Act - Section 207.2 - Subsection 207.2(3)||CRA’s assessment of Pt. XI.1 shown on the T3GR for all RRSPs of one type did not start the normal reassessment period for the taxpayer’s RRSP since no tax shown for it||370|
|Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(d.2)||distribution was not lawful because the issuer had not complied with the OM exemption, which was the exemption that it had chosen to rely on||291|
Subsection 204.2(1.2) - Undeducted RRSP premiums
Roy v. The Queen, 2019 TCC 50 (Informal Procedure)
The taxpayer began the 2006 taxation year with unused RRSP contributions of $1,856. He contributed an additional $43,000 during 2006, resulting in total unused contributions of $44,856. The taxpayer claimed RRSP deductions within the RRSP deduction limits for the 2006 to 2012 years for a total of $21,495. The RRSP excess contributions were invested in securities that quickly became worthless, so that except for the sum of $1,090 withdrawn in 2008, he was unable to withdraw the excess contributions and the RRSP account was eventually closed in March 2012. The taxpayer had not reported his excess contributions by filing a T1‑OVP return. The taxpayer submitted a relief application, which was accepted by the Minister in a letter in 2015 stating that she was satisfied that the “excessive contribution arose due to reasonable error” and that “your excessive contribution has been eliminated”. On that basis, the Minister confirmed the waiver of the tax under Part X.1 of 1% per month, penalties and interest (in the amount of $39,193.08.)
However, the Minister assessed the taxpayer’s 2013, 2014 and 2015 taxation years on the basis that he was not entitled to deduct unused RRSP contributions from prior years in those years (other than $2,000 allowed for 2013). Before finding that the taxpayer was entitled to the claimed deductions, Smith J stated (at paras 18, 20, 21-23):
While paragraph 204.1(1.1)(b) does allow cumulative excess contributions to an RRSP of up to $2,000, the Respondent has not pointed to any statutory provision which allows her to essentially set-off or eliminate unused RRSP contributions on the basis that they represent excess contributions that cannot be withdrawn. The Minister’s remedy appears to be limited to the 1% tax and penalty for failure to file the T1‑OVP form within 90 days from the end of the taxation year.
…[T]here appears to be no basis for the Respondent’s argument in this instance that, having consented to the Appellant’s relief application, the Minister may arbitrarily eliminate unused RRSP contributions.
The Respondent concludes … that it “would be unfair for this Court to allow him to reduce his taxable income in future years while never having paid taxes on the excess contribution as taxable income.” (My Emphasis).
…[T]he Respondent has failed to point to any legislative provision that would allow the Minister to eliminate unused RRSP contributions on the basis that they represent excess contributions.
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|Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Unused RRSP Deduction Room||CRA had no authority to eliminate unused RRSP contributions as being excess contributions||156|
What is the impact of an amount withdrawn from an RRSP on element J of the algebraic formula in s. 204.2(1.2)? CRA responded:
The term "undeducted RRSP premiums" used in the calculation of the cumulative excess amount in respect of RRSPs … represents the undeducted premiums, at a particular time in a taxation year, that the individual has paid into RRSPs. That amount is calculated according to the following formula: H + I - J. Element J … represents the amount by which the total of the following amounts exceeds any amount deducted under paragraph 60(l) in computing the individual’s income.
- Any amount the individual received in the year and before that time out of the RRSP and included in computing income for the year.
- Any amount the individual received in the year and before that time from a registered retirement income fund and that is included in computing the individual’s income for the year.
… Generally, a taxpayer's unused RRSP deduction room at the end of a taxation year is equal to the unused RRSP deduction room at the end of the preceding year plus the contribution room the taxpayer generated during the year minus, among other things, the premiums paid by the taxpayer that were deducted pursuant to subsection 146(5) or (5.1) for the year.
Since the income tax under subsection 204.1(2.1) is calculated monthly, at the end of the month … the time for calculating the cumulative excess amount in respect of RRSPs under subsection 204.2(1.1) and undeducted RRSP premiums under subsection 204.2(1.2) is at the end of each month. Consequently, when an individual has a cumulative excess amount in respect of registered retirement savings plans, the withdrawal of the excess reduces the amount of the undeducted RRSP premiums under subsection 204.2(1.2) and thereby the cumulative excess amount in respect of registered retirement savings plans for the months ending after the date of withdrawal.
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|Tax Topics - Income Tax Act - Section 204.1 - Subsection 204.1(2.1)||s. 204.1(2.1) tax ceases when, at the end of the month, there is no cumulative excess amount in respect of RRSPs||128|
"A contribution to an RRSP will generally not be considered to have been made until the financial institution to which an amount is sent accepts the amount as a contribution ... [T]he designation of an amount as a contribution can be revoked by the contributor at any time before it is so accepted by the institution."
The taxpayer claiming investment counsel fees must be the legal owner, i.e., the RRSP trustee, rather than the annuitant. If the annuitant pays the fees on behalf of the RRSP trust, the payment will be a gift made to the RRSP within the meaning of s. 204.2(1.2)I(b).