Principal Issues: [TaxInterpretations translation] Can an Indian take advantage of the exemption in paragraph 81(1)(a) for an amount taxable under 146(9) or (10) as part of an RRSP stripping scheme where the RRSP contributions come entirely from an RPP whose benefits would have been entirely tax-exempt?
Position: No.
Reasons: Where the RRSP contributions were made from an RPP whose benefits would have been fully exempt under paragraph 81(1)(a), the CRA has previously expressed the view that the benefits under the RRSP will usually be exempt. In our view, the Agency's usual position does not apply in the specific situation under review.
April 27, 2010
Montreal Tax Services Office Headquarters Abusive Tax Planning Income Tax Rulings Directorate Attention: Mr. Patrick Bélanger, CA, D. Fisc. Michel Lambert, CA, M.Fisc. (613) 957-8968
2009-033576
Registered Retirement Savings Plans (RRSP) Exemption from tax by virtue of the Indian Act
This is further to Ms. Marie-France Pleau's email of August 7, 2009, regarding the tax treatment of an amount received by an Indian in connection with an RRSP stripping scheme. It also takes into account our telephone conversations and the documents we have received to date.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Names of Parties and Terms
| XXXXXXXXXX | Mr. A |
| The Trust governed by a Registered Retirement Savings Plan of which Mr. A is a beneficiary (this is a locked-in plan) |
Trust A |
| Canada Revenue Agency | CRA |
| Fair Market Value | FMV |
| Registered Pension Plan | RPP |
| Registered Retirement Savings Plan | RRSP |
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act, R.S.C. 1985 (5th Supplement), c.1, as amended (the “Act").
The Facts
1. Mr. A is a person registered as an Indian under the Indian Act.
2. Mr. A obtained rights in an RPP through employment from which the salary was fully exempt from Part I tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act. (endnote 1) No interest in the RPP was obtained from any other source.
3. In XXXXXXXXXX, at Mr. A's request, an amount of $XXXXXXXXX was transferred directly from the RPP to Trust A.
4. Subsequently, and again at the direction of Mr. A, the trustee of Trust A acquired units in a cooperative at a cost of $XXXXXXXXXX. The Valuation Department in your office indicated that the units had a nil FMV at the time the Trustee acquired them. This transaction also took place in XXXXXXXXXXX.
5. Following that investment, Mr. A took out a loan from the cooperative in the amount of $XXXXXXXXXX.
6. The tax avoidance section of your office proposes to issue a reassessment to Mr. A in connection with a project involving approximately XXXXXXXXXX taxpayers.
7. On XXXXXXXXXX, you sent a proposed assessment to Mr. A indicating that you wished to add $XXXXXXXXXX to Mr. A's income for his XXXXXXXXXX taxation year. Since the taxation year is statute-barred, you relied on subsection 152(4). In support of your proposed assessment, you gave the following reasons:
We have considered that your RRSP "uses or permits to be used any property of the trust as security for a loan" i.e. the preferred shares of the COOP;
We have considered that your RRSP "acquired a property for a consideration greater than the fair market value of the property at the time of the acquisition" i.e. the preferred shares of the COOP;
We also have considered that your RRSP disposed of property for no consideration because it is our opinion that your investment in the preferred shares of the cooperative is a sham.
You also invoked the possible application of the general anti-avoidance provision:
In addition to the position outline above, we are also considering the application of the General Anti-Avoidance Rule ("GAAR") of subsection 245(2) of the Income Tax Act ("ITA") as an alternative position.
Your Questions
8. You wish to know if the amount of $XXXXXXXXXX you wish to add to Mr. A's income is exempt from Part I tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act so that subsection 146(9) or (10) would not have the effect of adding an amount in computing Mr. A's income.
Your Opinion
9. You are of the view that paragraph 81(1)(a) of the Act and section 87 of the Indian Act do not prevent the addition of the amount of $XXXXXXXXXX in computing Mr. A's income for his XXXXXXXXXX taxation year as you propose to do.
Opinion of Mr. A
10. On XXXXXXXXXX, Mr. A sent you a letter indicating that he should not be taxed on $XXXXXXXXXX. He in part stated:
[...] XXXXXXXXXX [...]
Our Opinion
11. On July 20, 2000, the Individual Programs Section issued a memorandum (endnote 2) to all Tax Services Offices regarding the exemption from income tax under the Indian Act for investment income and registered retirement savings plan payments. Among other things, it made the following comment:
[...] In other cases, amounts in an RRSP relate to amounts transferred from an RPP that relate to tax-exempt employment income. In [this situation], the Agency's position has not changed, and payments (principal and investment income) from the RRSP are usually tax-free. [emphasis added]
12. The Agency's position applies to routine situations. Mr. A's transactions are not routine. Therefore, we recommend that you do not exempt from Part I tax under paragraph 81(1)(a) of the Act and section 87 of the Indian Act the amount to be added in computing Mr. A's income under subsection 146(9) or (10), as the case may be.
13. Paragraphs 146(9)(a) and (b) have the effect of adding to the income of an annuitant under an RRSP trust the difference between the FMV of the property acquired by the trust and the consideration given for the property acquired (footnote 3). Similarly, subsection 146(10) has the effect of adding to the income of an annuitant under an RRSP trust the FMV of any property of the trust used or permitted to be used by the trust as security when the property began to be so used (endnote 4).
Access to Information
14. For your information, a copy of this memorandum will be severed using the Access to Information Act criteria (endnote 5) and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that these comments are of assistance.
Manager of the Financial Industries and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 R.S.C., C. I-6.
2 That memorandum has the reference number CSD HDM 4364-0.
3 Under the facts, that amount would be $XXXXXXXXXX.
4 i.d.
5 R.S.C., ch. A-1.