Principal Issues: [TaxInterpretations translation] Does the custodian of a retirement compensation arrangement (RCA) for the benefit of an employee have to deduct tax at source on the direct transfer of an amount from the RCA to a trust governed by the employee's RRSP?
Position: No, if the custodian has reasonable grounds to believe that the amount represents a premium that is deductible under subsection 146(5) or paragraph 60(j.1).
Reasons: Wording of paragraph 100(3)(c) of the Income Tax Regulations.
XXXXXXXXXX François Mathieu 2017-070096
June 9, 2017
Dear XXXXXXXXXX,
Subject: Withholding tax applicable to the amount paid by the custodian of a retirement compensation arrangement ("RCA")
This is in response to your email of April 13, 2017 in which you asked us to confirm whether the custodian of a retirement compensation arrangement (the "Custodian") is required to withhold tax at source under paragraph 153(1)(q) on the direct transfer of an amount from the retirement compensation arrangement ("RCA") that qualifies as a retiring allowance ("RA") to a trust governed by a registered retirement savings plan ("RRSP") of an individual in the following circumstances:
Scenario 1:
1. X was the beneficiary of an RCA set up by his employer ("Employer").
2. In accordance with the terms of the RCA, the Employer made contributions to the Custodian in order to pay X $50,000 upon retirement.
3. The amount of $50,000 to be paid by the Custodian to X under the RCA qualified as an RA.
4. X was also the annuitant of an RRSP.
5. X retired in 2017.
6. X's Notice of Assessment for his 2016 taxation year confirmed that his RRSP deduction limit for his 2017 taxation year was $75,000.
7. On November 1, 2017, the Custodian made a direct payment of $50,000 to X's RRSP.
8. In computing his income for his 2017 taxation year, X included an amount of $50,000 pursuant to paragraph 56(1)(x).
Scenario 2:
1. X was the beneficiary of an RCA set up by his Employer.
2. In accordance with the terms of the RCA, the Employer made contributions to the Custodian to pay X an amount of $50,000 upon his retirement.
3. The amount of $50,000 that the Custodian was required to pay to X under the RCA qualified as an RA.
4. X is also the annuitant of an RRSP.
5. X retired in 2017.
6. The eligible portion of the retiring allowance received by X qualifying for the deduction pursuant to paragraph 60(j.1) was $20,000.
7. X's notice of assessment for his 2016 taxation year confirmed that his RRSP deduction limit for his 2017 taxation year was $30,000.
9. In computing his income for his 2017 taxation year, X included an amount of $50,000 pursuant to paragraph 56(1)(x).
10. On November 1, 2017, the Custodian made a direct payment of $50,000 to X's RRSP.
Our Comments:
This technical interpretation provides general comments on provisions contained in the Income Tax Act ("ITA") and the Income Tax Regulations ("ITR"). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
Paragraph 153(1)(q) of the ITA provides that every person paying at any time in a taxation year an amount as a distribution to one or more persons out of or under a retirement compensation arrangement, must deduct or withhold from the payment the amount determined in accordance with prescribed rules and must remit that amount to the Receiver General for Canada.
ITR subsection 103(4) deals with amounts that an employer must withhold where a lump sum payment is made by an employer to an employee who is a resident of Canada. In this regard, ITR subsection 100(1) defines the term employer as any person paying remuneration. In addition, paragraphs 100(1)(b.1) and (c) of the ITR provide that remuneration includes the amount from an RCA as well as a retiring allowance. Finally, ITR subsection 103(6) provides that a lump sum payment includes, among other things, a retiring allowance.
The Custodian who pays an amount from an RCA that qualifies as a retiring allowance to an individual is therefore required to withhold at source and remit to the Receiver General an amount in accordance with the rules set out in ITR subsection 103(4).
ITR paragraph 100(3)(c) provides, however, that the amount of remuneration paid by an employer that is otherwise subject to a withholding and remittance obligation is reduced where a portion of such amount is paid as a premium under a registered retirement savings plan, to the extent that the employer believes on reasonable grounds that the premium is deductible under ITA paragraph 60(j.1) or subsection 146(5) or (5.1) in computing the employee’s income for the taxation year in which the payment of remuneration is made.
The rules applicable to the determination of an amount deductible under paragraph 60(j.1) are set out in Income Tax Folio S2-F1-C2 entitled “Retiring Allowances” (the "Folio"). Paragraph 2.29 of the Folio provides that individuals with years of service before 1996 may be able to transfer all or part of a retiring allowance to their RRSP on a tax-deferred basis where it was included in computing the individual’s income under subparagraph 56(1)(a)(ii) or paragraph 56(1)(x). The transfer of the retiring allowance does not affect the individual's RRSP deduction limit. Paragraphs 2.30-2.31 of the Folio deal specifically with the conditions of application that must be established as well as the parameters for calculating the maximum amount deductible under paragraph 60(j.1).
As set out in Chapter 5 of the Guide, we consider that an employer has reasonable grounds to believe that a premium paid to an employee's RRSP is deductible when the employee provides the employer with confirmation that the premium can be deducted for the year, or with a copy of the portion of the employee’s notice of assessment that indicates the maximum RRSP deduction for the year.
In light of the foregoing, we are of the view that the amount of remuneration paid by the RCA Custodian in the above two scenarios was not subject to a withholding and remittance obligation. The facts establish that the entire amount from the RCA was paid to X's RRSP, and that the Custodian had reasonable grounds to believe that the entire amount ($50,000) was deductible under subsection 146(5) (Scenario 1) or that part of the amount ($20,000) was deductible under paragraph 60(j.1) and that the other part of the amount ($30,000) was deductible under subsection 146(5) (Scenario 2).
In this regard, we wish to confirm that the reasoning and conclusion found in Technical Interpretation 2006-016750 [2006-0167501E5] still reflect the CRA's position on the employer's obligation to withhold at source where all or part of the remuneration is paid directly to the employee's RRSP.
We hope you find these comments of assistance.
Best regards,
Dave Beaulne, CPA, CA
Section Manager and Director
International Operations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch