A retirement compensation arrangement (RCA) consists of a supplementary retirement plan (for one employee) that has developed surplus that the employer wishes to withdraw without withholding (based on a waiver letter requested by it to be provided by CRA to the custodian) on the basis that the employer, as a partnership, is not taxable under Part I of the Act. In rejecting the employer’s position, the Directorate stated:
Since the Payment is not a “lump sum payment” for the purposes of the withholding rules, it is subject to subsection 102(1) of the Regulations. … Since Schedule I does not address this situation, the Payment is subject to subsection 106(1). Under this rule, withholding is generally based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient with respect to the payment.
Although no tax is payable under Part I of the Act by a partnership, subsection 96(1) of the Act ensures that the members of the partnership are taxable on their respective share of the partnership’s income. In our view, in applying subsection 106(1) of the Regulations in this situation, the amount to be withheld from the Payment should be equal to the total amount of tax that may reasonably be expected to be payable under the Act by the members of the employer partnership with respect to the Payment.
…In filing their income tax return for the taxation year in which they report their share of the partnership’s income, each member of the partnership would be entitled to apply their share of the income tax withheld in respect of the Payment.