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Is RDSP Income Taxable for Aboriginal People?

When money is withdrawn from an RDSP, it is considered to be comprised of private contributions, government contributions and investment income in the same proportions as in the RDSP.  Two parts – government contributions and investment income – are taxable when withdrawn.

For Aboriginal people living on a reserve, the Indian Act exempts from taxation personal property, including income, situated on a reserve.  This raises the question, “How will RDSP income for Aboriginal people living on reserve be treated?”

In Williams v. the Queen, the Supreme Court of Canada (“SCC”) sets out the two-step methodology for determining the location of the personal property: the “connecting factors approach”.  First, the relevant material factors connecting personal property are identified.  Second, the factors are assessed   to determine what weight should be given to each.  In considering whether income is taxable, both federal government contributions and investment income would need to be assessed in this fashion.

In a letter to Planned Lifetime Advocacy Network (March 2011), the Canada Revenue Agency (“CRA”) suggested that on-reserve residency of an RDSP beneficiary would not be sufficient in and of itself to situate the income on a reserve.  On that basis, CRA argues, the payment of the Canada Disability Savings Grant and Bond into an RDSP could probably not be situated on a reserve.  Furthermore, they argue that, “the fact that an RDSP is set up and managed through a financial institution located on a reserve is not sufficient, in and of itself, to situate the investment income of the RDSP on a reserve. In general, unless the income-generating activities of the issuer with respect to the particular investment instrument take place exclusively on a reserve, the investment income will not be situated on a reserve.  Consequently, we would expect that, in most cases, the portion of a payment out of a RDSP that relates to investment income would be taxable to an Indian beneficiary” (source: www.pancardapply.in).

In applying the Williams approach, two recent Supreme Court of Canada decisions call into question the above CRA opinion.  Bastien Estate v. Canada and Dube v. Canada, released concurrently July 22, 2011, examine the question of whether interest income earned by a status Indian on deposits at a credit union situated on reserve is tax-exempt as personal property situated on a reserve.  In both cases, the Supreme Court of Canada overturned the Tax Court and the Federal Court of Appeal, and ruled the tax exemption under s. 87 of the Indian Act applies to the interest income.  In fact, Mr. Dube received a favourable decision in spite of living and spending the investment income in question predominately off-reserve.  You should be aware the Supreme Court of Canada attached significant importance to the contractual nature of the investment (i.e. term deposit) each taxpayer had with the credit union.   On this basis, we can expect that situations where status Indian’s hold RDSPs at a financial institutions situated on reserve to be examined on a case-by-case basis and to be determined on their particular facts.

At a minimum, this opens the door for Aboriginal people to open RDSPs with financial institutions located on reserve, and depending on the type of investment, make withdrawals where the investment income is not taxable.  This is particularly significant because in long term savings plans (30 years), even with modest investment income returns, the investment income is likely to comprise the larger proportion of the RDSP and hence the larger proportion of any withdrawals.Read further here:incorporate company in Singapore to benefit from tax exemption reliefs for people like RDSP investors.