18 May 2005 External T.I. 2005-0119101E5 - Distributions from RCA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1. What are applicable rules for the following distributions from a RCA: refunds of excess contributions to plan Sponsor; distribution of remaining assets of the plan on wind-up to the Sponsor?

2. If Sponsor is tax exempt, is withholding rate nil?

Position: 1. The amount to be deducted or withheld from a distribution that is a refund of the Sponsor's excess contributions would be determined pursuant to subsection 106(1) of the Act. The amount to be deducted or withheld from a distribution of the remaining assets in a RCA to the Sponsor upon wind-up of the plan would be determined pursuant to subsection 106(1) of the Regulations if the RCA is not a "superannuation or pension fund or plan" and pursuant to subsection 103(4) if it is.

2. The amount to be withheld pursuant to subsection 106(1) is based on the amount of tax that may reasonably be expected to be payable under the Act by the recipient. It is a question of fact what is a reasonable method for computing the amount to be withheld in particular situations. If the Sponsor is tax exempt, the withholding rate would be nil only if the Sponsor has provided the RCA with a letter of authority from its Tax Services Office.

Reasons: Part I of and Schedule I to the Income Tax Regulations.

XXXXXXXXXX  								2005-011910
R. Maley
May 18, 2005

Dear XXXXXXXXXX:

Re: Distributions from RCA

This in reply to your letter of February 22, 2005 regarding the requirement under the Income Tax Act ("the Act") to withhold and remit taxes in respect of certain distributions made by the custodian of a retirement compensation arrangement ("RCA"). The distributions at issue are refunds of excess contributions to the employer who is the plan sponsor ("the Sponsor"), and distributions of any remaining assets of the plan on wind-up to the Sponsor.

Written confirmation of the tax implications inherent in particular transactions is 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 inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Pursuant to paragraph 153(1)(q) of the Act, every person who in a taxation pays an amount as a distribution to one or more persons under a RCA shall deduct, withhold and remit an amount in accordance with prescribed rules. Pursuant to paragraph (b.1) of the definition "remuneration" in subsection 100(1) of the Income Tax Regulations ("the Regulations"), an amount of a distribution out of or under a RCA is remuneration for purposes of Part I of and Schedule I to the Regulations.

Subsection 100(1) of the Regulations defines an "employer" for these purposes as any person paying remuneration; an "employee" is any person receiving it. Thus, the custodian of the RCA is an employer for the purpose of determining the applicable withholding rate, and the Sponsor is an employee for that purpose.

Subsection 103(4) of the Regulations sets out the applicable withholding rates for lump sum payments made by an employer to an employee who is a resident of Canada. A "lump sum payment" is defined for the purposes of subsection 103(4) in subsection 103(6) of the Regulations. A refund of RCA surplus to the Sponsor would not appear to be a lump sum payment under this definition.

A distribution of RCA plan assets to the Sponsor on wind-up ("a distribution") would be a lump sum payment for purposes of subsection 103(4) of the Regulations if the RCA was a superannuation or pension fund or plan. It is a question of fact whether a particular plan is a superannuation or pension fund for purposes of the Act.

If a distribution is not a lump sum payment within the meaning of subsection 103(4) of the Regulations, it is subject to subsection 102(1) of the Regulations. Schedule I to the Regulations sets out withholding rates for specified types of pay periods for the purposes of paragraph 102(1)(c). Subsection 106(1) of the Regulations applies where a period or amount is not addressed in Schedule I.

Distributions that are not lump sum payments appear to be payments of remuneration subject to subsection 106(1) of the Regulations. As such, the amount to be withheld will be based on the amount of tax that may reasonably be expected to be payable under the Act by the Sponsor with respect to the total remuneration the RCA expects to pay to the Sponsor for the year.

Whether a particular method for computing the amount to be withheld under subsection 106(1) in a particular situation is reasonable is a question of fact. Questions about proposed methods for computing the amount to withhold under subsection 106(1) should be referred to the employee's Tax Services Office. To reduce the remuneration in respect of which withholding is to occur (e.g., because the Sponsor is exempt from tax on the income under Part I of the Act), the Sponsor would have to provide the RCA with a letter of authority from its Tax Services Office. Details about obtaining a letter of authority may be found in Chapter 4 of the CRA's Guide T4001 "Employers' Guide - Payroll Deductions", which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4001/README.html.

While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.

Yours truly,

Roxane Brazeau-LeBlond, CA
Manager
Aboriginal and Non-Profit Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch