2014-0547711E5 Indian Pension Income - T4RSP/T4RIF

Principal Issues: Whether we should amend T4RSP/T4RIF slips to add a box to report exempt portion of withdrawal?

Position: Not at this time.

Reasons: See below.

Author: Meers, Rob
Section: 87 Indian Act; 81(1)(a) Income Tax Act

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                                                                                                                                                                              2014-054771
                                                                                                                                                                              R. Meers
                                                                                                                                                                              (613) 957-2100
February 4, 2015

Dear XXXXXXXXXX:

Re: T4RIF and T4RSP Amendment

Thank you for your correspondence of June 2, 2014, about possible amendments to the T4RSP and T4RIF slips. We are constantly working to ensure that taxpayers and tax preparers can interact with the CRA as quickly, simply, and effectively as possible. We continually strive to improve our services and the variety of ways through which they are available.

As you are probably aware, an Indian, as that term is defined in section 2 of the Indian Act, cannot contribute tax-exempt income to a registered retirement savings plan (“RRSP”). This is because the Income Tax Act (the “Act”) permits amounts to be contributed to an RRSP based on an accumulation of “earned income” as defined in subsection 146(1) of the Act. Since the definition of earned income does not include income that is exempt from taxation pursuant to paragraph 81(1)(a) of the Act, an Indian cannot contribute to an RRSP with respect to exempt income.

If an Indian does have taxable income and contributes to an RRSP then the regular income tax rules apply and, generally, any withdrawal will be taxable when received by the Indian.

However, an Indian may transfer an amount from his or her registered pension plan to an RRSP. In these situations a determination of the tax status of the pension income prior to the transfer must be made. It has been the position of the CRA that if the 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 registered retirement income fund (“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. 

You have suggested that modifying the T4RSP and T4RIF slips to include a separate box to report tax-exempt income would stream line and simplify the process of preparing income tax returns for Indians with tax-exempt retirement income. While we appreciate this fact, we do have some concerns with your proposed amendment. Our primary concern is the fact that the submission of a TD1 IN “Determination of Exemption of an Indian’s Employment Income” and a copy of a valid Status Card in and of itself is not sufficient evidence to determine whether the income is exempt from tax. Moreover, it is our opinion that it is not the responsibility of the financial institution to make the determination on whether the underlying employment income was exempt. As you mentioned, a similar change was made to the T4 and T4A slips, however, in those cases, the employer or the pension plan administrator would have more information with respect to the tax-exempt status of the employment income in order to prepare the slips or to provide to those engaged to prepare the slips on their behalf.

In addition, as outlined above, generally, RRSP and RRIF income is not exempt from tax. We are concerned that adding a box indicating that RRSP income of an Indian is tax-exempt may lead some to think that the income is exempt in all cases.

In order for the exemption to be claimed on a withdrawal with respect to exempt pension amounts transferred to an RRSP or RRIF, the following information should be submitted:

*     The total contributions made to the RRSP with tax-exempt income (exempt transfers)
*     The total contributions made to the RRSP, and
*     The total amount of the withdrawal

A letter from the RPP administrator indicating the exempt amounts transferred directly to the RRSP or RRIF would satisfy the first requirement. Assuming a copy of the letter is provided to the RRSP/RRIF administrator, they should be able to calculate the amount of the withdrawal subject to tax withholding based on the total contributions to the plan. Note that additional information may be requested in certain circumstances.

Providing the information listed above to the Taxpayer’s accountant should allow the accountant to properly report the taxable portion, if any, of the withdrawal.

We will continue to explore means to simplify the reporting process, however, for the reasons indicated above, we will not be adding additional boxes to the T4RSP or T4RIF slips at this time.

We trust that these comments will be of assistance.

Yours truly,

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

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