Principal Issues: Application of subsection 153(1) to the payment of an amount as a distribution out of or under a RCA that can reasonably be considered to have been received, in respect of an office or employment of the Taxpayer, by a Former spouse of the taxpayer, pursuant to the terms of a court order or a separation agreement.
Position: The Former spouse is the “payee” for purposes of subsection 153(1) and the “employee” for purposes of Part I of the Regulations in respect of the RCA Payment. Thus, for purposes of determining the amount to be withheld, the “employee” is the Former spouse, and any such amount withheld from the RCA Payment is to be remitted on account of the income tax of the Former spouse for the year. Under subsection 200(1) of the Regulations, a T4A-RCA Form is to be issued to the Former spouse in respect of the RCA Payment.
Reasons: Prior positions, wording of the Act and Regulations.
January 8, 2025
Collections and Verification Branch HEADQUARTERS Business Compliance Directorate Income Tax Rulings Directorate Employer Compliance Division Simon Morin Specialty Tax Division 2024-103287 Attention: Judith Mahoney
Re: Payee for purposes of paragraph 153(1)(q)
All references to a provision in this document is a reference to the Income Tax Act (the “Act”), unless specifically otherwise provided.
We are writing in reply to your inquiry of August 13, 2024, in which you requested our views in respect of the application of subsection 153(1) to the payment of an amount as a distribution out of or under a retirement compensation arrangement (“RCA”) that can reasonably be considered to have been received, in respect of an office or employment of the taxpayer (the “Taxpayer”), by a former spouse of the taxpayer (the “Former spouse”), pursuant to the terms of a court order or a separation agreement (the “RCA Payment”).
Our comments
Inclusion of RCA Payment in taxable income
Paragraph 56(1)(x) provides that a taxpayer is generally required to include in income any amount, whether such amount has been received by the taxpayer or another person, out of or under a RCA that can reasonably be considered to have been received in respect of the office or employment of the taxpayer. Where paragraph 56(1)(x) applies and the amount has been received by a person other than the taxpayer, subparagraph 56(1)(z)(ii) provides that the other person is not to include the amount in their income for the year.
In the situation described in your inquiry, it is our understanding that paragraph 56(1)(x) would apply to require the amount of the RCA Payment to be included in the income of the Taxpayer on the basis that such payment can reasonably be considered to have been received in respect of the office or employment of the Taxpayer. Therefore, by virtue of subparagraph 56(1)(z)(ii), no amount in respect of the RCA Payment would be included in the income of the Former spouse.
Withholding at source and Slip reporting for RCA Payment
Paragraph 153(1)(q) provides that a person who makes a distribution out of or under a RCA is required to withhold the amount determined under the rules set out in Part I of the Income Tax Regulations (the “Regulations”) and to remit the amount on account of the payee’s income tax for the year to the Receiver General.
Subsection 200(1) of the Regulations requires every person who makes a payment described in subsection 153(1) to make a return in prescribed form in respect of such payment.
Section 101 of the Regulations requires every person who makes a payment described in subsection 153(1) to withhold from the payment an amount, if any, as is determined in accordance with Part I of the Regulations. Subsection 100(1) of the Regulations provides that, for purposes of Part I of the Regulations, the term “remuneration” includes an amount of a distribution out of or under a RCA. Moreover, that subsection provides that an “employee” means any person receiving remuneration and that an “employer” means any person paying remuneration. It follows that the term “payee” for purposes of subsection 153(1) and the term “employee” for purposes of subsection 100(1) of the Regulations refer to the recipient of the payment.
In the situation described in your inquiry, it is our view that the “payee” for purposes of subsection 153(1) and “employee” for purposes of Part I of the Regulations, in respect of the RCA Payment, is the Former spouse (i.e., the recipient of the RCA Payment). Thus, for purposes of determining the amount to be withheld in accordance with Part I of the Regulations, the “employee” is the Former spouse. Likewise, any such amount to be withheld is to be remitted on account of the income tax of the Former spouse for the year. In our view, under subsection 200(1) of the Regulations, a T4A-RCA Form in respect of such payment is to be issued to the Former spouse, the recipient of the RCA Payment.
Reconciling taxable income and Withholdings at source
In contrast to paragraph 56(1)(a), paragraph 56(1)(x) does not require the Taxpayer to have received the RCA Amount, or a portion thereof, in order for that amount to be included in their income. While we recognize that a misalignment may result between the withholding (i.e., on the payment to the Former spouse) and the taxation of the RCA Payment (i.e., in the hands of the Taxpayer) as a result of the application of paragraphs 56(1)(x) and 153(1)(q) to the RCA Payment, any income tax withheld on the RCA Payment could be claimed by the Former spouse upon the filing of their income tax return for the year.
We further note that although the Taxpayer would have to include the amount of the RCA Payment in income for the year by virtue of paragraph 56(1)(x), the Taxpayer would have no amount to report on account of the income tax withheld for the year in respect of the RCA Payment. This could be expected to result in the Taxpayer having an amount of income tax owing upon filing of their income tax return.
Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.
We trust our comments will be of assistance.
Yours truly,
Sophie Larochelle
Section Manager
Specialty tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch