Vol. 150, No. 5 — March 9, 2016
SOR/2016-30 February 26, 2016
INCOME TAX ACT
Regulations Amending the Income Tax Regulations (Withholding of Income Tax on Payments from Registered Disability Savings Plans)
P.C. 2016-96 February 26, 2016
His Excellency the Governor General in Council, on the recommendation of the Minister of National Revenue, pursuant to section 221 (see footnote a) of the Income Tax Act (see footnote b), makes the annexed Regulations Amending the Income Tax Regulations (Withholding of Income Tax on Payments from Registered Disability Savings Plans).
Regulations Amending the Income Tax Regulations (Withholding of Income Tax on Payments from Registered Disability Savings Plans)
1 The definition remuneration in subsection 100(1) of the Income Tax Regulations (see footnote 1) is amended by striking out “or” at the end of paragraph (m), by replacing rémunération at the end of paragraph (n) with “or” and by adding the following after paragraph (n):
- (o) an amount of a disability assistance payment made under a registered disability savings plan that is required by paragraph 56(1)(q.1) of the Act to be included in computing a taxpayer’s income; (rémunération)
2 The Regulations are amended by adding the following after section 103:
103.1 (1) For the purpose of the description of C in subsection (2), plan payment means
- (a) in the case of a disability assistance payment that is a lifetime disability assistance payment, the total amount of all the lifetime disability assistance payments that have been made or that may reasonably be expected to be made to the employee under the plan in their taxation year and that the employer has reasonable grounds to believe are described in paragraph (o) of the definition remuneration in subsection 100(1); or
- (b) in the case of a disability assistance payment that is other than a lifetime disability assistance payment, the amount of the payment that is made to the employee under the plan and that is described in paragraph (o) of the definition remuneration in subsection 100(1).
(2) If an employer makes a disability assistance payment under a registered disability savings plan to an employee who is a resident of Canada, the employer shall, in lieu of the amount determined under section 102, deduct or withhold from the payment an amount determined by the formula
(A − B) × C
A is the amount of the disability assistance payment that is made to the employee and that is described in paragraph (o) of the definition remuneration in subsection 100(1);
- (a) if the beneficiary of the plan is deceased, nil, or
- (b) the amount by which the total of the following amounts exceeds the total amount of all the disability assistance payments previously made to the employee in their taxation year and that are described in paragraph (o) of the definition remuneration in subsection 100(1):
- (i) the amount used under paragraph (c) of the description of B in subsection 118(1) of the Act for the taxation year, and
- (ii) the amount used under the description of B in subsection 118.3(1) of the Act for the taxation year; and
- (a) if the plan payment does not exceed $5,000 and the amount is paid
- (i) in Quebec, 5 per cent,
- (ii) in any other province, 7 per cent, or
- (iii) in Canada beyond the limits of any province or outside Canada, 10 per cent,
- (b) if the plan payment exceeds $5,000 but does not exceed $15,000 and the amount is paid
- (i) in Quebec, 10 per cent,
- (ii) in any other province, 13 per cent, or
- (iii) in Canada beyond the limits of any province or outside Canada, 20 per cent, or
- (c) if the plan payment exceeds $15,000 and the amount is paid
- (i) in Quebec, 15 per cent,
- (ii) in any other province, 20 per cent, or
- (iii) in Canada beyond the limits of any province or outside Canada, 30 per cent.
3 The portion of subsection 104(2) of the Regulations before paragraph (a) is replaced by the following:
(2) No amount shall be deducted or withheld from a payment in accordance with any of sections 102 to 103.1 in respect of an employee who was neither employed nor resident in Canada at the time of payment except in respect of
4 Subsection 202(2) of the Regulations is amended by striking out “or” at the end of paragraph (l), by adding “or” at the end of paragraph (m) and by adding the following after paragraph (m):
- (n) a payment described in paragraph 212(1)(r.1) of the Act,
5 Subsection 204(3) of the Regulations is amended by striking out “or” at the end of paragraph (e), by adding “or” at the end of paragraph (f) and by adding the following after paragraph (f):
- (g) governed by a registered disability savings plan, except if paragraph 146.4(5)(a) or (b) of the Act applies.
6 These Regulations apply as of July 1, 2015.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
The Income Tax Act (the Act) requires that tax be withheld from certain payments such as remuneration. The person making such payments is required to remit the amount withheld to the Receiver General on behalf of the payee. The withholding of income tax from the taxable portions of those payments is to be done in accordance with prescribed rules.
Part I of the Income Tax Regulations (the Regulations) provides the rules concerning the amounts to be withheld on account of tax by a person paying remuneration. The Regulations define what amounts are to be included in remuneration, what proportion of such remuneration is subject to withholdings and the percentage that must be withheld from such remuneration on account of tax. The Regulations also impose reporting requirements on the person making the payments.
Registered Disability Savings Plans (RDSP) were introduced in Budget 2007 and the required amendments to the Act were incorporated in the Budget and Economic Statement Implementation Act, 2007. A RDSP is a trust arrangement between a holder and an issuer (a corporation offering the public its services as a trustee). The purpose of such a plan is to provide for the long-term financial security of a beneficiary who has a prolonged and severe physical or mental impairment.
Contributions can be made to the RDSP by the beneficiaries, their parents or family members, or by other authorized contributors. Amounts can also be paid into the RDSP by the Government of Canada as Disability Savings Grants or Disability Savings Bonds. Contributions are not tax deductible and are not included in the beneficiary’s income when they are paid out of the RDSP. However, the grants and bonds and the investment income earned in the plans are included in the beneficiary’s income for tax purposes when they are paid out of the plans.
Payments to RDSP beneficiaries are known as disability assistance payments (DAPs). Lifetime disability assistance payments (LDAPs) are DAPs that, once started, are payable at least annually until the plan is terminated or the beneficiary has died. Both types of payments may be comprised of a portion that is taxable in the hands of an RDSP beneficiary (grants, bonds and investment earnings) and a portion that is not (contributions).
The amendments made to the Act in 2007 also provided for the withholding of income tax from amounts paid from these plans. However, these tax withholding requirements remained inoperative until the coming into force of these regulatory amendments.
- — Enable the withholding of income tax from payments from RDSPs;
- — Ensure that the appropriate amount of income tax is withheld on the correct amounts; and
- — Ensure that the Canada Revenue Agency (CRA) has the information it needs for the administration and enforcement of the Act.
In order to achieve the above-stated objectives, the following amendments to the Regulations have been made:
Including payments in the base
The definition of “remuneration” in the Regulations has been amended to include the taxable portion of any DAP and LDAP, as this amount is the base for withholding.
Determining the amount to be withheld
Since many LDAPs may be paid in the same year, the Regulations have been amended to define the taxable portion of the total of all LDAPs that are expected to be paid in a calendar year as being one “plan payment” for purposes of determining the correct withholding rate. The Regulations also define the taxable portion of any DAPs to be a “plan payment” to ensure that the correct rate of withholding is applied. The Regulations set out the withholding rates that must be applied to the “plan payment.”
In addition, the Regulations have been amended to include a formula that carves out an amount equal to the sum of the beneficiary’s personal basic exemption and the disability tax credit for the year from any payments made before withholding begins.
Reporting requirements — Payments to non-residents
The Act imposes a 25% tax on certain amounts paid to a non-resident of Canada by a person resident in Canada. The Act was amended to apply this tax to RDSP payments that would have been required to be included in the income of the taxpayer had the taxpayer been a resident of Canada. The Regulations also prescribe reporting requirements with respect to these payments.
The Regulations have been amended to require that every person resident in Canada file an information return in the prescribed form if they pay a non-resident of Canada an amount from an RDSP that is subject to non-resident withholding tax.
Reporting requirements for trusts
The Regulations require that all trustees file an annual information return in prescribed form. However, the Regulations also list certain trusts that are exempt from this filing requirement. This proposal adds trusts governed by an RDSP to the list of exempted trusts in order to reduce the administrative burden on RDSP issuers.
Prior to publication in the Canada Gazette, Part I, RDSP issuers were consulted with respect to the amendments and they expressed concern with the additional complexity that results from requiring withholding only on amounts exceeding the personal basic exemption and the disability tax credit. Their concern was that this could result in beneficiaries receiving reduced payments at the end of the year.
The CRA also held information sessions with associations representing persons with disabilities and RDSP beneficiaries. The associations expressed similar concerns regarding the complexity of the withholding formula and how beneficiaries would manage the variation in the amount of the payments received.
In response to these concerns, the CRA has indicated that it will administratively allow withholding to be applied to each payment throughout the year rather than waiting until after the above threshold has been exceeded.
The amendments to the Regulations were published in the Canada Gazette, Part I, on May 9, 2015, followed by a 30-day consultation period. One technical comment was received with respect to the manner in which certain terms are defined. Following analysis, it was concluded that no amendments are necessary. Stakeholders also sought confirmation that the withholding rates and the underlying policy of the amendments were the same as had been previously shared with them, which the CRA was able to confirm.
These amendments may impose new administrative costs on business. As the amendments address tax administration, they are carved out from the “One-for-One” Rule.
Small business lens
The small business lens does not apply, as there are no costs imposed on small business.
The amended Regulations now prescribe rules with respect to payments made from RDSPs in order to make the withholding provisions of the Act operative and to ensure that the CRA has the information it needs for the administration and enforcement of the Act and the Regulations.
The implementation of these amendments ensures that the appropriate amount of tax is withheld at source on RDSP payments in order to avoid situations where beneficiaries are faced with a large tax liability when they file their individual tax returns.
Further, a requirement that RDSP trusts file an annual information return is unnecessary since the CRA already receives information with respect to RDSPs electronically pursuant to an agreement between it and Employment and Social Development Canada.
Implementation, enforcement and service standards
These regulatory amendments apply to any payments made from an RDSP on or after July 1, 2015.
Based on estimates received from RDSP issuers, these amendments could impose incremental administrative and compliance costs in the range of $54,000 to $450,000 per issuer relating to the development and implementation of one-time system and procedural changes necessary to calculate, remit and report the amounts withheld.
The Act and Regulations, which are administered by the CRA, contain penalty provisions for non-compliance with these provisions. Normal CRA compliance activities will be used to ensure compliance.
Trust Accounts Programs Division
Canada Revenue Agency