11 April 2003 External T.I. 2003-0000685 - DAMAGES FOR RRSP LOS PAID TO ANNUITANT

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 CCRA.

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

Principal Issues:

Is a settlement amount paid to an annuitant for loss incurred by an RRSP investment taxable? If so, how is the amount to be reported and do withholding taxes apply?

Position:

Yes the amount is taxable and withholding taxes apply. The amount should be reported on a T4RSP.

Reasons:

When the RRSP experiences an actionable loss on an investment, any damages are the property of the RRSP and should be paid to the RRSP. If the damages are paid to the annuitant, we are of the view that the annuitant receives a taxable benefit under subsection 146(8).

2003-000068
XXXXXXXXXX Renée Shields
(613) 948-5273
April 11, 2003

Dear XXXXXXXXXX:

Re: Settlement amount paid to registered retirement savings plan (RRSP) annuitants

This is in response to your electronic message of January 24, 2003 as well as our conversation on April 4, 2003 (XXXXXXXXXX/Shields) inquiring about the taxability of amounts paid to RRSP annuitants with respect to losses incurred by an RRSP investment.

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 submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

You have described a scenario in which as a result of a class action settlement pertaining to a publicly traded company, certain amounts are payable to its shareholders on a net-loss basis. You represent the court-appointed administrator of the settlement fund. In some cases, the shareholder was an RRSP. In a situation in which the RRSP has been collapsed, the settlement amount has been paid to the RRSP annuitant. You have asked whether withholding taxes apply to the payment and how to report the amount.

An RRSP trust is a separate person from the annuitant of the RRSP. We assume that the RRSP trust was a plaintiff in the class action since it was the trust, as shareholder, that suffered the loss. Accordingly, it is appropriate that damages be paid to the RRSP trust. If instead the damages are paid to the annuitant, the CCRA is of the view that the annuitant has received a taxable benefit under subsection 146(8) of the Income Tax Act (the "Act"). As such, paragraph 153(1)(j) of the Act requires that the payer remit withholding taxes to the Receiver General.

Payment of the settlement amount to the annuitant should be reported using a T4RSP slip. You may wish to refer to the T4RSP and T4RIF Guide (T4079) for assistance in completing the form. If the payer does not have a business number, it is recommended that one be obtained at the tax services office serving the payer as the business number should be referenced on the T4RSP and when remitting the withholding taxes. Upon applying for a business number, you will likely be provided with a number of forms including the one necessary to remit withholding taxes. We are advised that the appropriate form for remittance purposes is the PD7A.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch