Principal Issues: 1) Whether the cumulative excess amount of an individual in respect of RRSPs is reduced by an amount received in the year by the individual out a RRIF of which the individual is the annuitant?
2) Whether the answer would be the same if the amount were received out of a life income fund (“LIF”) or a locked-in retirement account (“LIRA”)?
Position: 1) Yes, to the extent the individual does not claim a deduction under paragraph 60(l). The amount of the withdrawal is to be included in computing the individual’s income.
2) Yes.
Reasons: 1) and 2) The Act and prior positions. A LIF and a LIRA are, for the purposes of Act, treated respectively as a RRIF and a RRSP.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 7 OCTOBER 2021
2021 APFF CONFERENCE
Question 9
Excess contribution subject to Part X.1 tax and RRIF withdrawal
Part X.1 of the Income Tax Act (footnote 1) provides for the tax on excess RRSP contributions. The tax, provided for in subsection 204.1(2.1), applies where an individual has, at the end of a particular month, a “cumulative excess amount in respect of registered retirement savings plans”.
The calculation of the cumulative excess amount is made under subsections 204.2(1.1), 204.2(1.2) and 204.2(1.3). In particular, subsection 204.2(1.1) defines the “cumulative excess amount in respect of registered retirement savings plans” that will be subject to tax under subsection 204.1(2.1). The definition in subsection 204.2(1.1) requires, inter alia, the determination of the amount of “undeducted RRSP premiums” paid by the individual to RRSPs before the particular time.
Subsection 204.2(1.2) provides a formula for calculating an individual’s undeducted RRSP premiums at a particular time for purposes of, inter alia, paragraph 204.2(1.1)(a). Element J in the formula in subsection 204.2(1.2) reduces the amount of those undeducted premiums.
Paragraph (a) of the description of J provides that taxable withdrawals in the year from an RRSP, a registered retirement income fund (“RRIF”), a specified pension plan or a pooled registered pension plan (“PRPP”) reduce the individual’s undeducted premiums. As a result, those withdrawals reduce the amount of "the cumulative excess amount of an individual in respect of registered retirement savings plans” as defined in subsection 204.2(1.1).
This is also reflected in the instructions that appear on Form T1-OVP (footnote 2), which is the prescribed form that must be filed each year by an individual subject to Part X.1 tax under subsection 204.3(1). This form is used to calculate the amount subject to Part X.1 tax. It notes, inter alia, that RRIF withdrawals included or required to be included in the individual’s income for the year are to be entered on line 5 of page 2 and that the amounts entered on this line reduce the amount subject to Part X.1 tax. The instructions for line 5 read as follows:
“Enter the RRSP, PRPP, SPP and RRIF payments that you included or will include in income for 2020. Enter them in the column for the month that you received or are considered to have received them (see Note 4 on page 4 of this return).”
Questions to the CRA
Can the CRA confirm the following:
(a) Do taxable RRIF withdrawals made by the individual in a particular month, that were not re- contributed to the RRSP using the paragraph 60(l) deduction, reduce the amount of “undeducted RRSP premiums” paid by the individual and thus the “cumulative excess amount in respect of RRSPs” as defined in subsection 204.2(1.1)?
(b) Are taxable withdrawals from a life income fund (“LIF”) also covered by paragraph (a) of the description of J as taxable withdrawals from a RRIF?
(c) Would the same apply to taxable withdrawals from a Locked-In Retirement Account (“LIRA”) or other locked-in RRSP, where such withdrawals are permitted by and made in accordance with the applicable pension legislation (federal or provincial)?
CRA Response to question 9(a)
By virtue of subsection 204.1(2.1), an individual who, at the end of a month, has a cumulative excess amount in respect of RRSPs must, in respect of that month, pay a tax under Part X.1, equal to 1% of that cumulative excess amount. The definition "cumulative excess amount in respect of RRSPs" is found in subsection 204.2(1.1) and, at any time in a taxation year, is the amount, if any, by which the amount of the individual’s undeducted RRSP premiums at that time exceeds the amount determined under paragraph 204.2(1.1)(b). In general terms, that calculation involves the addition of several items, including "unused RRSP deduction room" as defined in subsection 248(1) at the end of the preceding taxation year and the contribution room for the year [f.n. The term "contribution room" refers to letter B in the algebraic formula for the definition of "unused RRSP deduction room" and the definition of "RRSP deduction limit". That letter also represents letter B in the calculation of the cumulative excess amount in respect of RRSPs in paragraph 204.2(1.1)(b).], plus an amount of $2,000.
The amount of "undeducted RRSP premiums" paid by an individual at any time, for the purpose of calculating the cumulative excess amount in respect of the RRSPs, is determined pursuant to the formula in subsection 204.2(1.2):
H+I-J.
The description of J in that definition, which reduces the amount of undeducted RRSP premiums paid by an individual at a particular time, is the amount, if any, by which the total of all amounts received by the individual in the year and before that time out of or under, inter alia, an RRSP or RRIF and included in computing the individual’s income for the year exceeds the amount deducted under paragraph 60(l) in computing the individual’s income for the year.
Since the tax under subsection 204.1(2.1) is calculated monthly, at the end of the month, it is our view that the particular time for computing the "cumulative excess amount in respect of RRSPs" under subsection 204.2(1.1) and of the "undeducted RRSP premiums" under subsection 204.2(1.2) is at the end of each month. Consequently, where an individual has a cumulative excess amount in respect of RRSPs, any amount withdrawn by the individual from a RRIF that is included in computing the individual's income under subsection 146.3(5) and paragraph 56(1)(t) without otherwise being deducted by the individual under paragraph 60(l) reduces the amount of undeducted RRSP premiums under subsection 204.2(1.2), thereby reducing the cumulative excess amount in respect of RRSPs for months ending after the date of withdrawal.
Finally, it should be noted that under subsection 204.3(1), an individual who is required to pay the 1% tax under subsection 204(2.1) must file a T1-OVP return no later than 90 days after the end of the taxation year. If an individual makes a withdrawal that results in the elimination of the individual's cumulative excess amount in respect of RRSPs, no tax under subsection 204.1(2.1) will be payable for any month ending after the withdrawal. However, the individual must still file Form T1-OVP and pay tax for the months in which the taxpayer had a cumulative excess amount in respect of RRSPs. Subsection 204.3(2) provides that subsection 162(1) applies. Consequently, failure to file the T1-OVP return may result in a penalty of 5% of the tax payable, plus 1% of the outstanding balance for each full month that the return is late, to a maximum of 12 months.
CRA Response to questions 9(b) and 9(c)
IRA and LIF have no significance for purposes of the Income Tax Act. As stated in Information Circular 78-18R6 (footnote 4), LIRAs and LIFs are arrangements that meet the locking-in requirements under pension standards legislation. For the purposes of the Income Tax Act, a LIRA is an arrangement that meets the requirements for an RRSP and a LIF meets the requirements for a RRIF. Consequently, for purposes of the Income Tax Act, a LIRA is simply an RRSP and a LIF is a RRIF. Therefore, the comments set out in response to question 9(a) would also apply to a LIRA or LIF, with the necessary adaptations in the case of a LIRA.
Mélanie Beaulieu
(343) 543-2154
October 7, 2021
2021-090350
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 R.S.C. (1985), c. 1 (5th supp.) (“I.T.A.”).
2 CANADA REVENUE AGENCY, Form T1-OVP 20__, "Individual Tax Return for RRSP, PRPP and SPP excess Contributions".
3 The term "contribution room" refers to letter B in the algebraic formula of the definition of "unused RRSP deduction room" and the definition of "RRSP deduction limit". This item also represents letter B in the calculation of the RRSP cumulative excess amount in paragraph 204.2(1.1)(b) I.T.A.
4 CANADA REVENUE AGENCY, Information Circular 78-18R6, "Registered Retirement Income Funds", March 6, 2002.