2 October 1989 External T.I. 74235 F - General Anti-Avoidance Rule

Subject: Section 217 Election General Anti-Avoidance Rule

This is in reply to your letter of August 15, 1989 in which you requested our opinion with respect to the application of section 245 in the situation described below.

Employees of a non-resident corporation became employees of the Canadian subsidiary of the non-resident corporation and at or about that time became resident in Canada.  While resident in Canada each employee contributed $3,500 annually to an RRSP and deducted the amount of such contribution pursuant to paragraph 60(i).  Each annual contribution was made to a different RRSP and was invested by the RRSP in a certificate of deposit.  The Canadian subsidiary loaned the employee the amount of each annual contribution and charged interest at the same rate as the rate of interest earned by the monies in the RRSP.

The employees left Canada several years after they became resident.  When they left Canada they owed the Canadian subsidiary for principal and interest an amount equal to the value of the property in their RRSP's.  Each year that the certificate of deposit held by each RRSP matured, the trustee paid the amount in the RRSP, less the appropriate withholding tax, to the Canadian subsidiary which applied it against the monies owing to it by its former employee.

Each year that an employee was credited with a payment, he filed an election under section 217 electing to have the amount referred to in paragraph 212(1)(1) taxed under Part I of the Act.  His personal exemptions reduced to nil the Part I income resulting from the inclusion of the paragraph 212(1)(1) amounts and, as a result, he obtained a refund of the tax withheld by the trustee.  You expect that commencing for the 1988 taxation year tax credits will reduce to nil any Part I tax payable by employees as a result of their making an election under section 217 to pay tax under Part I in respect to paragraph 212(1)(1) amounts.

We assume that there is no question that the loans made by the Canadian subsidiary to the employees are real.

You asked whether section 245 of the Act would apply in cases similar to that described above.  In our opinion, it would not.  The annual withdrawal of an amount from one of several RRSP's to which the taxpayer had contributed or the making of the election under section 217 might be avoidance transactions within the meaning of subsection 245(3) of the Act.  However, neither transaction would, if it were an avoidance transaction, be a misuse of section 217 or an abuse having regard to the provisions of the Act read as a whole.

The Act permits a taxpayer who is resident in Canada, temporarily or not, to make deductible contributions to an RRSP.  The rules governing RRSP's were recently amended to permit a taxpayer to receive an amount as a benefit out of an RRSP without having to include in income the entire amount in the RRSP, or the entire amount in the RRSP and other RRSP's that he may own.  Section 217 permits a non-resident to elect under section 217 to have payments out of a registered retirement savings plan, less relevant deductions, taxed under Part I instead of having the amounts taxed under paragraph 212(1)(1) of the Act.Section 217 does not distinguish between periodic and lump sum payments received from an RRSP and does not in any circumstances deny otherwise relevant deductions that would reduce the taxpayer's income to nil.  In becoming non-resident, making annual withdrawals from their RRSPs and filing a section 217 election, it appears that the taxpayers are complying with the plain meaning of section 146, paragraph 212(1)(l) and section 217, and for this reason, it cannot be maintained that the avoidance transactions would constitute a misuse of a provision of the Act or an abuse of the Act read as a whole.

M.A. Hiltzfor Director General Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch