18 July 1997 Internal T.I. 9716996 - REFUND OF PREMIUMS FROM RRSP/RRIF

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Tax consequences to deceased annuitant, RRSP and RRIF trusts, and spouse beneficiary after death of annuitant when distribution occurs later than 1 full calendar year after year of death.

Position:

General comments on RRSP trust; analysis of consequences re RRIF given specific facts.

Reasons:

Explains law.

			July 18, 1997

	HEADQUARTERS	HEADQUARTERS
	Client Services Directorate	P. Spice
	Lysanne Gauvin	(613) 957-8953
	Acting Director General
	Attention:  Rick Owen
			971699

Death of Annuitant of a Registered Retirement Savings Plan
("RRSP") and a Registered Retirement Income Fund ("RRIF")

As previously agreed (Spice/Owen) and further to your e-mail message of July 8, 1997, we are forwarding a request for advice from the Saskatoon Taxation Services Office of June 24, 1997, concerning the payment in 1997 of benefits out of an RRSP and a RRIF after the death of the annuitant in 1994. The enquiries were initiated by XXXXXXXXXX and enclosed are its letters of May 29, 1997, and June 19, 1997, together with attachments. We understand that you will reply directly to the tax services office but wish us to provide our views. Our comments follow.

RRSP

On the assumption that the RRSP has not matured, the deceased is deemed to have received a benefit out of the RRSP in the year of death equal to the fair market value of all the property of the plan at the time of death (paragraph 146(8.8)(a) of the Income Tax Act - the "Act"). This amount is included in the deceased annuitant's income for the year of death pursuant to paragraph 56(1)(h) of the Act. A deduction from the amount deemed to have been received is available pursuant to subsection 146(8.9) of the Act with respect to a specified fraction of the total "refunds of premiums" in respect of the RRSP.

Any amount paid in 1997 to the spouse of the deceased annuitant as a consequence of the death is considered a "refund of premiums" as defined in subsection 146(1) of the Act except for that portion which is a "tax-paid amount". "Tax-paid amount" is defined in subsection 146(1) of the Act as the amount taxable in the RRSP trust by virtue of paragraph 146(4)(c) of the Act without taking into account any deduction permitted under subsection 104(6) of the Act; where the annuitant died in 1994, tax is payable under paragraph 146(4)(c) on its taxable income for the 1996 and 1997 taxation years.

Assuming the deduction is taken for the deceased under subsection 146(8.9) of the Act with respect to the total refunds of premiums the spouse is subject to tax on the refund of premiums received out of the RRSP in 1997 pursuant to subsection 146(8) and paragraph 56(1)(h) of the Act. The amount which is a "refund of premiums" which is used by the spouse in 1997 or within 60 days of the year end to contribute to his or her RRSP or RRIF can be deducted by the spouse for the 1997 taxation year pursuant to paragraph 60(l) of the Act.

The amount on which the RRSP trust has paid tax (its taxable income for 1996 and, perhaps, 1997) is received tax-free by the spouse since it is excluded from the definition of "benefit" in subsection 146(1) of the Act. This amount is not eligible for a paragraph 60(l) tax-free transfer to an RRSP or RRIF.

The RRSP trust is subject to tax on its taxable income in 1996 and 1997 and may claim a deduction pursuant to paragraph 104(6)(a.2) of the Act (as previously proposed in Bill C-69) equal to the amount of taxable income earned in 1997 which is paid to the spouse in 1997. If the RRSP trust claims a deduction under paragraph 104(6)(a.2) of the Act, this amount is taxable to the spouse recipient as a "benefit" under subsection 146(8) of the Act and is not eligible for a tax-free transfer to an RRSP or RRIF pursuant to paragraph 60(l) of the Act.

RRIF

Upon the death of the last annuitant of a RRIF, subsection 146.3(6) of the Act deems the annuitant to have received immediately before death an amount out of the RRIF equal to the fair market value of the property at the time of death. This amount is included in the deceased annuitant's income for the year of death pursuant to paragraph 56(1)(t) of the Act.

Subsection 146.3(6.2) permits a deduction from the deceased annuitant's income for the year of death of an amount not exceeding a specific percentage of the total "designated benefits" in respect of the RRIF.

Any amounts earned in a RRIF trust in 1996 or 1997 are subject to tax in the RRIF trust pursuant to subsection 146.3(3.1) of the Act with a deduction available in 1997 for the amount paid to a beneficiary in accordance with previously proposed paragraph 104(6)(a.2) of the Act.

A "designated benefit" of an individual is defined in subsection 146.3(1) of the Act in paragraph (b) of that definition to mean the total of amounts paid out of or under the RRIF after the last annuitant's death to the individual that would be a "refund of premiums" had the fund been an unmatured RRSP. As stated above, the amount paid to the spouse, not including the "tax-paid amount" (the amount taxable in the RRIF trust pursuant to subsection 146.3(3.1) without applying any deduction available under previously proposed paragraph 104(6)(a.2)), is a refund of premiums and therefore when received out of the RRIF as a consequence of death, is a "designated benefit" to the spouse.

The portion of the designated benefit which is deductible to the spouse under paragraph 60(l) upon transfer to an RRSP or RRIF is the eligible amount calculated in accordance with subsection 146.3(6.11).

Using the examples provided by XXXXXXXXXX, the tax consequences for the deceased annuitant, the RRIF trust, and the spouse beneficiary are as follows:

1. 1994

Income inclusion to deceased annuitant of fair market value of RRIF at time of death = $100,000.

2. 1995

$6,000 earned in RRIF trust and not paid - not taxable to any person.

3. 1996

$5,300 earned in RRIF trust and not paid - included in RRIF trust's income. After tax of $1,600 paid, balance of earnings = $3,700.

4. 1997

$4,000 earned in RRIF trust and paid to spouse in the year. The RRIF trust did not pay tax on this amount having taken a deduction under proposed paragraph 104(6)(a.2). This amount is taxable to the spouse pursuant to subsection 146.3(5) of the Act.

In addition to the $4,000, the spouse receives the balance in the RRIF representing $100,000 value on death, $6,000 earned in 1995, and $3,700 after-tax earnings for a total of $113,700.

The "designated benefit" of the spouse is $106,000 - the amount that would have been paid as a refund of premiums if the RRIF had been an unmatured RRSP. This amount is taxable to the spouse pursuant to subsection 146.3(5) and excludes the amount earned in the RRIF trust in 1996 and 1997 (income of the trust for a taxation year for which the trust was not exempt from tax by virtue of subsection 146.3(3.1)) and also excludes any amount which is or remains taxable income to the deceased annuitant under subsection 146.3(6). Assuming that the deceased annuitant will not be taxed on any portion of the $100,000 after the deduction under subsection 146.3(6.2) discussed below, the income inclusion to the spouse is $106,000.

As you point out, it is not possible to calculate the amount eligible for a paragraph 60(l) transfer since we do not have the "minimum amount" for 1997. (The "minimum amount" is calculated in accordance with the rules set out in either subsection 7308(3) or (4) of the Income Tax Regulations and uses, where the annuitant has died before the year, the age in whole years "that would have been ... attained by the individual if the individual had been alive at the beginning of that year". As you pointed out in your e-mail, since the value of the property in the RRIF has increased since the year of death, the minimum amount should be greater than the $8000 quoted for 1994.) However, the known values are A = $106,000, C = nil and D = $106,000. We also agree that the fair market value of the RRIF on which the "minimum amount" is calculated will include the $5,300 amount of 1996 income even though the RRIF trust is required to pay income tax on it in 1997.

We agree with your calculation of the deduction under subsection 146.3(6.2) of the Act as set out in your e-mail and explain it as follows:

(B + C - D)
A x (1 - (B + C) )

where

A = (a) $106,000 + (b) $7,700 (Tax-paid amount (if RRIF were an RRSP and definition of "tax-paid amount" in subsection 146(1) applied) received by individual who received "designated benefits") + (c) nil = $113,700.

B = Nil (Fair market value of RRIF at the later of (a) December 31, 1995 and (b) November 10, 1997 - the time immediately after the distribution to the spouse of the designated benefits)

C = $113,700 (Total of all amounts paid out of the RRIF after the death of the annuitant)

D = $100,000 (Lesser of (a) FMV at time of death of annuitant and (b) the sum of B and C).

No amount will be payable by the RRIF trust in 1997 on its taxable income because of the off-setting deduction under paragraph 106(4)(a.2) of the Act for the amount paid to the spouse.

Thank you for your assistance herein. As requested we will forward a copy of this document by e-mail. Please provide us with a copy of your response to the tax services office.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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