Principal Issues: 1) Can the taxpayer transfer shares from an unregistered employee share purchase plan account to an RRSP account? 2) Can the taxpayer then withdraw an amount from another RRSP for which he is the annuitant to avoid the tax on over-contributions to RRSP?
Position: 1) Yes, it will constitute a premium in kind. 2) Yes, the Act does not require a withdrawal be from the same plan in order to reduce the cumulative excess amount; however, there would be adverse tax consequences to the individual.
Reasons: 1) Paragraph 24 of IT-124R6. 2) The wording in subsections 204.2(1.1) and (1.2); the withdrawal would be included in income pursuant to subsection 146(8).
XXXXXXXXXX 2004-009339 P. Kohnen, CMA October 7, 2004
Dear XXXXXXXXXX:
Re: Technical Interpretation - RRSP over-contribution and withdrawal
This is in response to your facsimile submission of September 1, 2004 and our subsequent telephone conversation (XXXXXXXXXX/Kohnen) wherein you requested our comments regarding the transfer of shares from an unregistered account to a registered retirement savings plan ("RRSP").
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.
Based on your submission and the above-noted telephone discussion, the relevant facts may be summarized as follows:
1. You are a participant in an employee share purchase plan ("ESPP") in which you have shares of your employer that are held in an unregistered account within the plan.
2. The ESPP also provides for a registered component, whereby any shares purchased under the plan may be contributed to an RRSP under the plan for which you are the annuitant. The terms of the ESPP do not allow for property other than shares acquired under the ESPP to be transferred to the RRSP component. Accordingly, although you have other RRSPs not governed by the ESPP, you cannot transfer cash or other property from those other RRSPs to your RRSP under the ESPP.
3. In accordance with the terms of the ESPP, a participant may elect to move shares from the unregistered account to the RRSP account without jeopardizing membership in the plan, however, if the shares are moved to any other RRSP outside of the ESPP, or are otherwise withdrawn from the ESPP, the participant forfeits all rights to future participation in the ESPP.
4. Your "RRSP deduction limit", as defined in subsection 146(1) of the Income Tax Act (the "Act"), is nil for 2004.
Your submission states that you are contemplating the transfer of the shares in your unregistered ESPP account to the RRSP component of the plan. Within several days of the transfer of the shares to the RRSP account, you are contemplating a withdrawal from other RRSPs for which you are the annuitant. You intend to withdraw an aggregate amount that is equal to the fair market value of the premium that will result from the transfer of the shares to the RRSP account within the ESPP.
Our comments
You may wish to review Interpretation Bulletin IT-320R3 for a discussion of the kinds of property that constitute qualified investments for RRSPs.
As is noted in paragraph 24 of Interpretation Bulletin IT-124R6 - Contributions to Registered Retirement Savings Plan, the payment of a premium to an RRSP could include a contribution or transfer of property other than cash. In our view, the proposed transfer of shares from the unregistered account to the RRSP component of your plan would constitute a premium.
In accordance with paragraph (c) of the definition of "disposition" in subsection 248(1) of the Act, the transfer of property to a trust governed by an RRSP will be a disposition for the purposes of the Act. The proceeds of disposition and the amount of the premium considered to be paid would be equal to the fair market value of the property transferred or contributed by the taxpayer.
Where a taxpayer holds shares that are to be contributed or transferred to an RRSP as capital property, any taxable capital gain arising on the disposition must be included in income. Pursuant to clause 40(2)(g)(iv)(B) of the Act, any loss on the disposition by a taxpayer of a capital property to that taxpayer's RRSP is deemed to be nil.
In accordance with subsection 204.2(1.1) of the Act, if a premium (in kind or in cash) is paid by a taxpayer to an RRSP when the taxpayer's RRSP deduction limit is nil, a "cumulative excess amount" will generally result. In accordance with subsection 204.1(2.1), where an individual has a cumulative excess amount at the end of a month after December, 1990, the individual will be liable for a tax in respect of that month equal to 1% of the cumulative excess amount.
Pursuant to subsection 204.2(1.2) of the Act, the amount of an individual's "undeducted RRSP premiums" at a given time will be reduced by the amount by which any amounts that are received by the individual in the year out of an RRSP and included in the individual's income for the year exceed the amount (if any) deducted from the individual's income for the year under paragraph 60(l) of the Act. A reduction in an individual's undeducted RRSP premiums will generally result in a corresponding reduction in that individual's cumulative excess amount, by virtue of paragraph 204.2(1.1)(a) of the Act, and thus a reduction or elimination of the 1% monthly tax (as noted above) that would otherwise be exigible.
It should be noted that subsection 146(8) of the Act requires that amounts received in a year by a taxpayer as benefits out of or under an RRSP, other than excluded withdrawals under the Home Buyers' Plan or the Lifelong Learning Plan, will be included in computing that taxpayer's income for the year. Furthermore, where a taxpayer is aware that his or her RRSP deduction limit for the year is nil, and proceeds to pay a premium to his or her RRSP with the intention of receiving a subsequent payment, in our view, both avoidance conditions in paragraphs 146(8.2)(e) and (f) would apply, such that a deduction in respect of the amount received as benefits out of the RRSP would not be available to the taxpayer. Accordingly, the amounts withdrawn from RRSPs in the year would be taxable.
We have discussed your situation with officials of the Assessment and Client Services Branch within the Canada Revenue Agency. They have confirmed that your situation would not meet the criteria established for the granting of administrative relief.
Copies of the above-referenced publications are available from your local tax services office or on the Internet at the following site -
http://www.cra-arc.gc.ca/formspubs/type/menu-e.html.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Mr. Phil Kohnen at (613) 957-2093 should you require further information.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate