14 March 2001 External T.I. 2001-0071375 - INDIANS-PART X.1 TAX

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:

1. Could a status Indian who earns exempt income and has no RRSP contribution room for the year but nevertheless makes RRSP contributions be subject to the over-contribution RRSP tax in Part X.1?

2. If the status Indian withdraws the RRSP contributions and transfers the funds into a non-registered investment vehicle, such as a mutual fund or a GIC, which earns investment income that is taxable in the hands of the Indian, is the Indian entitled to claim the personal credits in ITA 118 as any other taxpayer?

Position:

1. Yes
2. Yes

Reasons:

1. See previous positions.

2. ITA 118 credits not based on whether taxpayer is or is not an Indian

XXXXXXXXXX 2001-007137
S. Parnanzone
March 14, 2001

Dear XXXXXXXXXX:

Re: Taxation of Income of a Status Indian

This is in reply to your correspondence of February 22, 2001, which was forwarded to us by the Kitchener-Waterloo Tax Services Office, and is further to our telephone conversation (Parnanzone/XXXXXXXXXX) of March 1, 2001, concerning taxation of a status Indian.

Given a situation where a status Indian contributes to an RRSP based on tax-exempt income such that the contributions are not deductible in computing income, the withdrawals of the principal would be tax-exempt but the withdrawals of any investment earnings would be taxed similarly to ordinary investment income, your question is whether the Indian could be liable to the penalty tax for RRSP over-contributions under Part X.1 of the Income Tax Act (the "Act").

In the situation where the above-mentioned Indian withdraws the funds from the RRSP and transfers them into non-registered investment vehicles, such as mutual funds and GICs, which generate investment income that is taxable in the hands of the Indian, your question is whether the Indian would be entitled to claim the personal credits under section 118 of the Act as any other taxpayer.

Our comments

The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.

An Indian may be subject to tax under Part X.1 of the Act in respect of over-contributions to an RRSP. The tax is computed with reference to the Indian's "cumulative excess amount" as defined in subsection 204.2(1.1) of the Act. As noted in paragraph 30 of Interpretation Bulletin IT-124R6, the cumulative excess amount is generally equal to the excess of the taxpayer's undeducted RRSP premiums over the aggregate of the taxpayer's RRSP deduction limit and $2,000 (The reference to $8,000 in IT-124R6 is due to the fact that IT-124R6 does not reflect amendments to the Act passed subsequent to the printing of the bulletin).

A taxpayer's RRSP deduction limit is based on the taxpayer's "earned income", as this expression is defined in subsection 146(1) of the Act. However, income that is exempt from tax pursuant to paragraph 81(1)(a) of the Act and section 87 of the Indian Act is not included in the calculation of a status Indian's earned income. Consequently, unless the Indian has earned income, the Indian will not have an RRSP deduction limit and, therefore, amounts in excess of the $2,000 margin contributed to the RRSP by the Indian will be subjected to tax under Part X.1 of the Act.

Where a status Indian is liable for any tax under Part X.1 of the Act, pursuant to subsection 204.3(1) of the Act, a Part X.1 return (T1-OVP) is required to be filed and the tax paid within 90 days after the end of the year in which a cumulative excess amount exists. However, the Minister may waive the tax pursuant to subsection 204.1(4) of the Act, and the late-filing penalties and interest may be waived in accordance with subsection 220(3.1) of the Act. The filing of the return (for years after 1991) may be waived under subsection 220(2.1) of the Act. The determination of whether these relieving provisions should be applied will only be done on a case-by-case basis. Affected individuals should contact their local tax services office for more information in this regard.

In order that Part X.1 tax be waived, paragraph 204.1(4)(b) of the Act requires that the excess contributions be withdrawn from the RRSP.

In reply to your second question, a status Indian, as a taxpayer, may be entitled to claim the personal tax credits in section 118 of the Act as any other taxpayer if the Indian meets the conditions of the credits sought to be claimed.

We trust that the foregoing comments are of assistance.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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