6 October 2017 APFF Financial Strategies and Financial Instruments Roundtable Q. 4, 2017-0707781C6 F - Withdrawal of undeducted RRSP contributions
Principal Issues: Whether a taxpayer is entitled to a deduction under subsection 146(8.2) upon withdrawing undeducted RRSP contributions in a situation where:
1) the amount withdrawn exceeds the taxpayer's cumulative excess amount for Part X.1 tax purposes at the time of the withdrawal?
2) the taxpayer has no cumulative excess amount for Part X.1 tax purposes at the time of the withdrawal?
Position: Yes, provided all the conditions of subsection 146(8.2) are satisfied.
Reasons: Although subsection 146(8.2) was enacted as a relieving provision for taxpayers who inadvertently contribute more than they are entitled to contribute to their RRSPs, its application is not dependent on the taxpayer being subject to Part X.1 at the time of the withdrawal.
Financial Strategies and Financial Instruments Roundtable, 6 October 2017
2017 APFF Conference
Question 4
Withdrawal of undeducted RRSP contributions
Subsection 146(8.2) permits a taxpayer to deduct a payment from a registered retirement savings plan ("RRSP") for a particular year if, in general terms:
- RRSP premiums were never deducted (paragraph (a));
- the payment from the RRSP is the portion of these undeducted premiums and does not result from certain transfers (paragraph (b));
- the payment from the RRSP is received within a particular time (paragraph (c)); and
- the payment is included in the taxpayer's income in the particular year (paragraph (d)).
However, the deduction is not permitted if it is reasonable to consider that:
- the taxpayer did not reasonably expect that the full amount of the premiums would be deductible in the taxation year in which the premiums were paid or in the immediately preceding taxation year (paragraph (e)); and
- the taxpayer paid all or any portion of the premiums with the intent of receiving a payment that, but for this paragraph and paragraph (e), would be deductible under this subsection (paragraph (f)).
Questions to the CRA
In any of the following situations can a taxpayer withdraw and deduct under subsection 146(8.2) an amount that would otherwise be deductible as a premium to an RRSP, if all the other conditions of that provision were met?
(a) Inadvertently, and without the intention described in paragraph 146(8.2)(f), a taxpayer pays in a given year a premium that exceeds his or her RRSP deduction limit for the year. The following year, the taxpayer's cumulative RRSP excess is reduced or even canceled due to the addition of new contribution room (footnote 1) for the year. As we understand it, the taxpayer may, in the year following the payment of the premium, withdraw and deduct under subsection 146(8.2) an amount that would otherwise be deductible in the year as an RRSP premium, if all other conditions are met. Take the following hypothetical situation:
Year 2016
- RRSP deduction limit for 2016: $25,370
- Premiums paid to the RRSP in January 2016: $25,370
- Premiums paid to the RRSP in October 2016: $30,000
- RRSP deduction used in 2016: $25,370
- RRSP cumulative excess amount since October 2016: $28,000
Year 2017
- New contribution room for 2017: $26,010
- RRSP cumulative excess amount since January 2017: $1,990
In order to avoid Part X.I tax in 2017, a withdrawal of $1,990 is required. In February 2017, the taxpayer withdraws an amount of $30,000 (an amount equal to the premiums not deducted at the end of 2016). Subsequently, in 2017, he and his employer contribute to a group RRSP in the amount of $26,010. If all the other conditions of subsection 146(8.2) are satisfied, based on our analysis of paragraph 146(8.2)(e), the $30,000 withdrawal would be eligible for a deduction for the 2017 taxation year pursuant to subsection 146(8.2) and the $26,010 amount paid to the RRSP would be deductible under subsection 146(5) as a premium to the RRSP. Do you agree with our understanding?
(b) In a particular year, an individual makes an RRSP contribution that does not exceed the RRSP deduction limit for the year. In the same year, the individual wishes to withdraw the contribution without affecting the individual’s RRSP rights. For example, an individual with a low income for the year does not wish to use the RRSP deduction and has a need for liquidity, or it turns out that a TFSA contribution so that the situation needs to be amended. Is the amount thus withdrawn eligible for the deduction taking into account paragraph 146(8.2)(e), if the conditions in paragraphs 146(8.2)(a) to (d), and (f) are satisfied?
CRA Response
In general, where a payment from an RRSP is received by a taxpayer, the payment constitutes a benefit as defined in subsection 146(1) and is included in computing the taxpayer’s income in accordance with subsection 146(8) and paragraph 56(1)(h). This is the case whether or not the amounts received from the RRSP had been deducted at the time the taxpayer had paid them to the RRSP as premiums.
Where the conditions for the application of subsection 146(8.2) are satisfied, this provision allows a taxpayer to deduct, in computing the taxpayer’s income for a taxation year, a payment the taxpayer received from an RRSP in the year if the payment is related to undeducted premiums and it is otherwise included in computing the taxpayer’s income for the year. This provision may, in particular, permit a taxpayer to reduce, without further tax impact, an RRSP cumulative excess amount (footnote 2) to which Part X.1 tax applies. That being so, the existence of an RRSP cumulative excess amount giving rise to Part X.1 tax is not a condition for the application of subsection 146(8.2). This provision can apply whether or not the annuitant is subject to Part X.1 tax at the time the payment is withdrawn from the RRSP.
In this respect, the fact that, in Situation (a), the payment received by the taxpayer in 2017 is more than the payment required to extinguish the tax under Part X.1, would not, by itself, preclude the application of subsection 146(8.2). Similarly, the fact that, in Situation (b), the taxpayer is not subject to tax under Part X.1 before receiving the payment would not in and of itself preclude the application of subsection 146(8.2).
By virtue of paragraph 146(8.2)(e), a taxpayer cannot claim a deduction under subsection 146(8.2) if it was reasonable to consider at the time the undeducted premiums were paid to the RRSP that the taxpayer did not reasonably expect that the full amount of the premiums would be deductible in the taxation year in which the premiums were paid or in the immediately preceding taxation year. In other words, under this paragraph, if undeducted premiums have resulted in an overcontribution then, subject to paragraph 146(8.2)(f), the deduction will only be possible if such excess contribution was in fact made inadvertently. The question whether this condition is satisfied is one of fact which can be determined only after having considered all the relevant circumstances and facts relevant to a particular situation. Whether or not the taxpayer has an RRSP cumulative excess amount at the time the taxpayer receives the payment for which he or she wishes to claim the deduction does not directly affect that determination. We have advised the Department of Finance of this position.
Finally, subsection 146(5) essentially provides that a taxpayer may generally deduct in computing his or her income for a taxation year the lesser of:
- the total of the premiums paid by the individual to his or her RRSP after 1990 and on or before the day that is 60 days after the end of the year to the extent that they were never deducted in computing his or her income for a preceding taxation year, and
- the taxpayer’s RRSP deduction limit for the year.
This deduction can be claimed either in the year the taxpayer pays the premiums to his or her RRSP or in a subsequent year.
Thus, in Situation (a), the $26,010 amount paid by the taxpayer to his or her RRSP after receiving the $30,000 amount would generally be deductible under subsection 146(5).
Mélanie Beaulieu
(613) 670-8905
October 6, 2017
2017-070778
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The term "contribution room" refers to element B of the algebraic formula in the definition of "unused RRSP deduction" and the definition of "RRSP deduction room" in subsection 146(1) and represents element B in calculating the RRSP cumulative excess amount in paragraph 204.2(1.1)(b).
2 Within the meaning of subsection 204.2(1.1)