20 June 1995 Internal T.I. 9418337 - RRSP WITHDRAWALS AND INVESTMENT INCOME OF STATUS INDIANS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Taxation of status Indians with respect to RRSP withdrawals and investment income.

Position TAKEN:

Based on Williams v. Her Majesty the Queen, 92 DTC 6320, (1992) 1 CTC 225, the Department is of the view that when payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated. This position is the same as the position for registered pension plan benefits, unemployment insurance benefits and Canada Pension Plan payments reflected in the Indian Act Exemption for Employment Income Guidelines issued in June, 1994.

In the case of investment income, the connecting factors specific to an individual will have to be examined.

Reasons FOR POSITION TAKEN:

In Williams, the Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

		June 20, 1995

	Source Deductions Division	HEADQUARTERS
	District Office and Taxation	M. Azzi
	 Centre Support Services	957-8953
	Attention: R. Cousineau
		7-941833

XXXXXXXXXX

This is in reply to your memo of July 15, 1994 requesting our comments on concerns raised in a March 29, 1994 memo you received from the Edmonton D.O. regarding the above-noted taxpayer. The D.O. has requested assistance in dealing with the taxation of status Indians with respect to RRSP withdrawals and investment income.

We apologize for the unavoidable delay that has been encountered in replying to your request. In light of the decision of the Supreme Court of Canada in Williams v. Her Majesty the Queen, 92 DTC 6320, (1992) 1 CTC 225, the Department has had to review its interpretation of the scope of the exemption from income taxation provided under the Indian Act.

Our Comments

One general direction provided in Williams was that "an overly rigid test which identified one or two facts as having controlling force...would be open to manipulation and abuse". The Supreme Court rejected the situs of the debtor test as the sole test for determining whether the personal property of an Indian was situated on a reserve. The approach adopted in Williams requires an examination of all factors connecting income to a reserve to determine if the income is located on the reserve.

Based on the guidance provided in Williams, the Department has reviewed its position on RRSPs. As a result of our review, we are of the view that when payments from an RRSP relate to income that was exempt from tax, the payments will usually be exempt from tax. If only a portion of the payments relate to income that was exempt, then the exemption will be prorated. This position is the same as the position for registered pension plan benefits, unemployment insurance benefits and Canada Pension Plan payments reflected in the Indian Act Exemption for Employment Income Guidelines issued in June, 1994.

However, a contribution to an RRSP cannot be deducted unless there is "earned income" as defined in subsection 146(1) of the Income Tax Act (the "Act"). Income that is exempt from tax does not generate "earned income", as it is excluded from income by virtue of paragraph 81(1)(a) of the Act. Consequently, where a contribution to an RRSP relates to income that is exempt from tax, the contribution cannot be deducted. Nonetheless, it is likely that such contributions may have been made in the past. In addition, formerly when a remission order applied to remit a status Indian's taxes otherwise payable on employment income, he or she would technically have had "earned income" and would have been entitled to contribute to an RRSP. Our revised position will exempt payments from an RRSP in both these instances since the contributions would have related to tax-exempt income or income that was accorded tax-exempt treatment by a remission order.

In the case of investment income, the connecting factors specific to an individual will have to be examined. It is our view that the location of a savings account on a reserve would not, in itself, be sufficient to exempt the interest income earned thereon. Similarly, the fact that the purchase of a guaranteed investment certificate or the investment in a term deposit takes place on-reserve would not, in itself, be sufficient to exempt the interest income earned thereon.

Of course, when all potential factors indicate a reserve location, the investment income will be subject to exemption. For instance, when a status Indian lives on-reserve, earns exempt income and makes deposits of funds into a savings account in a branch of a bank located on a reserve, that Indian's interest income earned on such account will be exempt from income taxation. At the other extreme, when a status Indian lives off-reserve and earns only taxable income, the deposit of funds into a savings account located on-reserve by means of an automated teller machine located off-reserve will not be sufficient to exempt the interest income earned on such account.

We trust that these comments will be of assistance.

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch