Principal Issues: Does Part XI.1 Tax apply to a non-qualified investment if the property was a qualified investment at the time of its acquisition?
Position: Yes
Reasons: As per legislation and as explained in IT-320R3.
XXXXXXXXXX 2010-035468 Andrea Boyle, CGA April 20, 2010
Dear XXXXXXXXXX :
Re: Part XI.1 Tax
This in reply to your email of January 19, 2010 in which you asked for clarification on whether Part XI.1 tax applies to an asset if the asset was purchased as a qualified investment and became a non-qualified investment while being held by a trust governed by a Registered Retirement Saving Plan (RRSP).
More specifically, you have indicated that your client has interpreted paragraph 28 of Interpretation Bulletin IT-320R3, Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds, to mean that no Part XI.1 tax applies on a non-qualified investment if the property was a qualified investment at the time of its acquisition. You have requested clarification of this issue.
The particular situation outlined in your facsimile appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
As indicated in paragraph 28 of IT-320R3, subsection 146(10) is not applicable when a property was a qualified investment at the time the trust governed by an RRSP acquired the property but later on the property became a non-qualified investment. In such a case, the plan annuitant will not have to include in income an amount equal to the fair market value of the non-qualified investment.
Under subsection 207.1(1), where a trust governed by an RRSP holds a property that is a non-qualified investment at the end of any month, the trust will be subject to Part XI.1 tax equal to 1% of the fair market value of the property at the time of its acquisition. Consequently, subsection 207.1(1) applies to qualified investments that become non-qualified subsequent to the date of acquisition and are held by the trust governed by the RRSP after becoming non-qualified.
Subsection 207.1(1) specifically excludes from the application of Part XI.1 tax, the situation where the annuitant has already included in computing its income, the fair market value of the property under subsection 146(10). Subsection 146(10) applies to situations where a trust governed by an RRSP acquires a property that was not a qualified investment at the time of acquisition. By virtue of subsection 146(6), when the trust governed by the RRSP disposes of a non-qualified investment which subsection 146(10) applied, the annuitant can deduct in computing its income for the year of disposition, the lesser of the amount previously included in its income pursuant to subsection 146(10) in respect of the acquisition of the non-qualified investment and the proceeds of its disposition.
Also, if a trust governed by an RRSP acquires a property which, at the time of acquisition, was a qualified investment and that property subsequently becomes a non-qualified investment, the trust governed by the RRSP will be subject to Part I tax pursuant to subsection 146(10.1) as explained paragraph 30 of IT-320R3.
We trust that these comments will be of assistance.
Yours truly,
Louise J. Roy, CGA
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch