Principal Issues: [TaxInterpretations translation] Where the attribution rule in subsection 146(8.3) applies, can source deductions also be attributed to the taxpayer who is liable for the tax?
Position: No
Reasons: The text of the Act does not allow such attribution.
Financial Strategies and Financial Instruments Roundtable, 7 October 2011
2011 APFF Conference
Question 8 - RRSP withdrawals, withholding tax, attribution rule and separation of spouses.
A decision rendered in January 2010 by the Court of Quebec (Small Claims Division) highlighted a particular problem that may arise with respect to withdrawals made from an RRSP for the benefit of a spouse or common-law partner where the attribution rule applies and the spouses separate later in the calendar year of the withdrawal.
Thus, in the decision Charrier v. Quebec (2010 EXP-2783), the individual had contributed $5,970 to his spouse's RRSP in 2005, which sum was deducted in 2005. In the summer of 2006, the amount of $5,805 was withdrawn from the RRSP. The financial institution made the applicable source deductions and remitted the balance to the taxpayer's spouse. Later in the year, the spouses separated. Under the applicable attribution rule (the 3 x December 31 rule) in subsection 146(8.3), the contributor had to be taxed on the amount of the withdrawal because the spouses were not living separate and apart at the time of withdrawal. However, it was his ex-spouse who "benefited" from taxes withheld at source. Indeed, no rules for attributing withholding tax at source are provided for in Québec legislation in this regard and it seems that the same principle applies in federal legislation. That aspect is therefore missing in the legislation.
In the decision referred to above, the Court of Quebec ruled in favor of the contributor in a decision animated more by considerations of fairness than by an analysis of the legislative provisions. Such a decision by the Small Claims Division, however, is not case law and cannot be extended to the application of tax law. Furthermore, it may be beneficial to address this issue to minimize the potential for conflict in such a situation.
Question to the CRA
Can the CRA confirm whether the tax treatment of withholding tax, as explained above, reflects the federal tax provisions?
CRA Response
Subsection 146(8) specifies that the total of amounts received by a taxpayer in a taxation year, as a RRSP benefit, must be included in computing the taxpayer’s income for the taxation year. However, where a plan is for the benefit of a spouse or common-law partner, there may be circumstances in which the taxpayer who paid plan premiums must also include all or part of the amount withdrawn from the plan in computing the taxpayer’s income. Indeed, subsection 146(8.3) specifies that where a withdrawal is made from an RRSP for the benefit of a spouse or common-law partner, where the spouses or common-law partners were not living separate and apart by reason of the breakdown of the marriage or common-law partnership, the taxpayer who has paid premiums to the taxpayer’s spouse's or common-law partner's RRSP will be required to include the amount withheld in computing the taxpayer’s income up to the amount the taxpayer contributed in the year or in one of the two preceding years. Where subsection 146(8.3) applies, subsection 146(8.6) allows the annuitant to claim a corresponding deduction so that two people do not have to include the same amount in computing their income.
Paragraph 153(1)(j) provides that any person paying a payment out of or under an RRSP must deduct or withhold from the payment the amount determined in accordance with the prescribed rules and must remit that amount to the Receiver General on account of the payee’s tax. In the situation described, the deductions are therefore made from the lump sum payment and designated as being for the account of the person receiving the amount, being the RRSP annuitant. No provision of the Act provides a link between the withholding tax on the payment to the annuitant and the attribution rule in subsection 146(8.3).
Catherine Ayotte
613-957-8962
October 7, 2011
2011-040825