2014-0540461I7 Indian Tax Exemption - RRSPs, RRIFs

Principal Issues: Whether payments from a RRSP or RRIF are taxable when paid to an individual who is an Indian.

Position: Likely.

Reasons: Would usually be contributed from earned income which does not include exempt income. However, amounts transferred from a RPP to a RRSP or RRIF in respect of exempt employment income and therefore exempt pension income would be treated in same manner as exempt.

Author: Merrigan, Lori
Section: 81(1)(a)

                                                                                                                                                        August 27, 2014

      Individual Returns and Payments
      Processing Directorate                                                                                                              HEADQUARTERS
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      Vanier Towers                                                                                                                            Lori Merrigan
      Ottawa ON  K1A 0L5                                                                                                                 (613) 957-9229

      Attention:  Sheila Barnard                                                                                                          2014-054046

         Indian Taxation –Retirement Savings Plans

This is in response to your e-mail of July 17, 2014, asking for our comments with respect to the tax treatment of amounts transferred to and then paid from a registered retirement savings plan (“RRSP”) or a registered retirement income fund (“RRIF”) to an individual who is an Indian, as that term is defined in subsection 2(1) of the Indian Act.

As you mentioned in your e-mail, an Indian cannot contribute tax-exempt income to an RRSP. This is because the Income Tax Act permits amounts to be contributed to a RRSP based on an accumulation of “earned income” as defined in subsection 146(1). Since the definition of earned income does not include income that is exempt from taxation pursuant to paragraph 81(1)(a), an Indian cannot contribute to a RRSP with respect to exempt income. If an Indian does contribute tax-exempt income to an RRSP, he or she may be subject to an over-contribution tax. The Indian will be allowed to take out the tax-exempt income from the RRSP without paying tax. However, if interest was earned on this amount then tax is likely payable on that interest income.

If an Indian does have taxable income and contributes to an RRSP then the regular income tax rules apply. 

However, it is important to note that an Indian may transfer an amount from his or her registered pension plan to a RRSP. In these situations a determination of the tax status of the pension income prior to the transfer must be made. If that pension income was wholly or partially tax-exempt (because the underlying employment income was tax-exempt) then payments from the RRSP will also be wholly or partially tax-exempt in the same proportion. 

The same rule applies to payments from a RRIF. If the RRIF was the result of the conversion of an RRSP which was created from the transfer of an amount from a registered pension plan, the tax treatment of the pension income flows through to the payments from the RRIF. 

We trust that our comments will be of assistance.

Roger Filion, CPA, CA
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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