If an employers contributions to an employees RRP are a taxable benefit how does the employee receive the associated tax deferral benefit?

[brett4182]

I have an issue on the go with the CRA that I would like your opinion on:

• CRA completed an audit on my employer and has said that the employers (ER) contributions to the employees (EE) RPP are a taxable benefit to the EE.

• Revised T4’s for 2015 and 2016 have been issued with the only change being an increase in box 14 equal to the amount of the ER’s RPP contributions and an explanation in box 40. For clarity: box 20 (RPP contributions) and box 52 (pension adjustment) didn’t change.

• The way I see it, with these T4 changes, the taxation result will be as follows:

  • EE will pay tax on the amount of the ER RPP contribution in the current year (and reassessed years)

  • EE will pay tax again on the same funds in the future when the funds are withdrawn from the RPP….double taxation

  • EE will have their eligible RRSP contribution amount reduced by the amount of the ER RPP contribution without the associated tax deferral benefit

I have talked with most senior CRA advisors available through telephone help. They agree that the concept of double taxation doesn't seem correct but they offer no advice on what to do about it.

In summary my questions are:

• Is my logic correct?

• Am I correct in arguing the double taxation?

• If I am correct, is there something I can reference to the CRA to argue my case?

[TurbotaxRobert · Accepted solution]

The circumstances you have described are extremely unusual and generally, the employer's share of the contributions to an RPP on behalf of an employee does not give rise to a "taxable benefit" as you have described.

Without getting into the particulars as to the legitimacy of CRA's approach in this particular payroll audit, IF there is a legitimacy to the audit result as described by you, the logical answer to your question regarding the avoidance of double taxation is as follows.  

The "taxable benefit" amount has in fact been contributed to the RPP, except that once it has been taxed in the employee's hands as an additional taxable benefit, the contributor of the additional RPP contribution is now the employee and not the employer and as a result, the employee should be entitled to claim a deduction for an additional RPP contribution equal to the "taxable benefit" added to his income.  This effectively negates the initial tax cost of the attributed tax benefit by creating an RPP deduction that offsets the "tax benefit".

Proper documentation regarding the RPP contribution should be obtained to support the claim for this additional RPP contribution that is now deemed to have been made by the employee instead of the employer.  As already mentioned, this is a highly unusual situation but the above suggestion would result in the avoidance of the "double taxation" scenario otherwise described.

[brett4182]

We are definitely dealing with a RPP. I was able to get a copy of the audit results and it looks like the auditor has erroneously classified the RPP as a RRSP. What a mess!

[TurbotaxRobert]

If you have documentation that indicates that the audit results are in error, there are two options to consider.  The first one is that the employer should be filing an Objection with regards to the Audit result so as to have the matter reviewed by the Appeals Division as regards the auditor's determination.  Similarly, the taxpayer that has had a taxable allowance added to his income also has the right to file a Notice of Objection in regards to the determination of this taxable benefit being added to his income.  Either option should result in a reversal of the auditor's decision if it is in fact determined that the auditor erroneously classified the RPP as a RRSP, as you have stated.

[brett4182]

I do have the documentation. I will pursue the options you have suggested. Thanks for your help.

[TurboTax-Terry]

Contributions by an Employer to a Registered Pension Plan (RPP) are not taxable benefits to an employee but are taxed in the employees hands on withdrawal from the plan in retirement. Could you be referring to another program paid for by the employer?

[brett4182]

We are definitely dealing with a RPP. I was able to get a copy of the audit results and it looks like the auditor has erroneously classified the RPP as a RRSP. What a mess!

[TurboTax-Terry]

It is highly unusual (as stated by TurboTaxRobert) for an experienced CRA Auditor not to be able to distinguish between an RPP and an RRSP structure. I suspect the issue resides with the creation of the pension program by the employer, their legal and accounting advisers. If the Audit was in error it is incumbent upon the Employer to rectify the problem. In any event if the Audit was correct then the employee has RRSP contribution receipts to claim as a deduction (subject to available contribution room) which will offset the taxable benefit rendering it tax nil. The funds will remain tax free until such time as the Annuitant (employee) removes them from the Registered Plan thereby avoiding double taxation.

[brett4182]

The retirement plan is a properly created RPP so that is not the issue. I have reviewed the audit result documents and I have identified the issue. The audit results contain a schedule of employer contributions to the pension plan. The schedule is simply an excel spreadsheet that summarizes contributions by employee. The author of the spreadsheet  has included "RRSP" in the title rather than "RPP". My assumption is that the auditor took the schedule title at face value rather than reviewing the pension plan documents to confirm RRSP vs RPP. I am not sure who created the schedule, either the auditor or the employer, but the next step is the appeal process.

[TurbotaxRobert]

Unfortunately, once the audit has concluded and the re-assessments (assessments) issued, the only available legal recourse is, in fact, the Appeals process.  However, the employer may wish to re-contact the original auditor and/or his superior and discuss the file one last time (with better knowledge of what transpired) and see if, once the circumstances are properly explained, CRA may consider reversing their findings on their own.  This might lead to a quicker resolution of the problem and also result in less cost being incurred (as opposed to the legal costs of an appeal).  No guarantees but, nothing ventured, nothing gained.  Best of luck.