RRSP withholding tax decision overturned on appeal
In a tightly worded eight-paragraph decision, the Court of Appeal of Ontario overturned a lower court’s decision in a case involving the deregistration of an RRSP investment and the appropriate amount of withholding tax to be applied on the in-kind withdrawal.
In April 2014, the Ontario Superior Court dealt with a situation in which a taxpayer directed his RRSP trustee to deregister private company shares held in his RRSP and to remit the applicable withholding tax to the CRA from the remaining cash in his RRSP account.
The taxpayer provided the trustee with a copy of a recent offer by a third party to sell shares in the company at $0.50 per share so that the trustee could establish a fair market value of the shares and correctly calculate the amount of tax to withhold.
But since the company was private, “it was not readily possible to ascertain their fair value on the basis of recent stock exchange trades” and his trustee refused to de-register the shares unless the taxpayer could provide a letter from an officer of the company setting out the fair market value of the shares.
Unable to produce such a letter from the company, the taxpayer and his trustee were “mired in this stalemate” and the taxpayer turned to the court for relief.
The RRSP trustee insisted that in order to comply with its obligations under the Income Tax Act, it was necessary for it to properly determine the fair market value of the shares and it is only after this information has been acquired that it would be “in a position to determine the appropriate calculation for withholding tax.”
Superior Court Justice Ted Matlow ordered the shares to be de-registered and “determined that there was no basis in law for (the trustee) to withhold tax.” The Court of Appeal said that Justice Matlow “erred in so holding” since that issue wasn’t before him. “This was not the appropriate forum to make that determination” since tax matters are only handled by the Tax Court of Canada.
The appeal court said the real issue was solely whether or not the taxpayer provided his RRSP trustee with sufficient information to allow it to deregister the shares. The taxpayer’s position was that he had provided adequate information, specifically, an offer by a third party to sell shares at the price of 50 cents per share.
The Court of Appeal concluded that the RRSP trustee “was within its contractual rights to refuse to deregister the shares on the basis of the information the (taxpayer) had provided. The offer, standing alone without the shareholders’ agreement or any other details of the company’s affairs, was inadequate.”
The court added that “it remains open to these parties to resolve the matter on the basis of proper documentation” and awarded the RRSP trustee $10,000 in costs.