22 May 2009 Internal T.I. 2009-0312791I7 F - Transfert de biens entre un rentier et son REÉR
Principal Issues: [TaxInterpretations translation] What are the tax consequences where an annuitant acquires property from an RRSP trust for consideration greater than the FMV of the property?
Position: The excess is a premium within the meaning of subsection 146(1), and could result in an over-contribution if the annuitant's "RRSP deduction limit" is not sufficient.
Reasons: Any transfer of property between an annuitant and the trust governed by the annuitant's RRSP must be made at FMV by virtue of subsection 69(1).
May 22, 2009
Montreal Tax Services Office Headquarters
Aggressive Tax Planning Income Tax Rulings Directorate
Attention: Patrick J. Bélanger Mélanie Beaulieu
(613) 957-92262009-031279
RRSP stripping strategy
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
This is further to your email of March 6, 2009, in which you asked our opinion on the application of the Act to a particular situation involving a registered retirement savings plan ("RRSP") stripping strategy. More specifically, you described a situation in which a taxpayer received a portion of the funds held in the individual’s locked-in RRSP through a scheme in which the trust governing that RRSP acquired shares of a particular cooperative (the "Co-op"). The fair market value ("FMV") of the shares of the Co-op was nil. You are asking us what the tax consequences would be if the RRSP transferred the Co-op shares to the taxpayer in exchange for consideration equal to the cost of the shares to the RRSP, in order to return the RRSP to the state it was in before it took part in the scheme.
Our Comments
The annuitant of an RRSP may acquire property from the trust governing the RRSP. This transfer between the annuitant and the RRSP must be made at FMV for the purposes of the Act and any excess of the consideration paid over the FMV of the property transferred is considered to be a premium paid by the annuitant.
This is so because, generally speaking, transactions between an annuitant and the trust that governs the annuitant’s RRSP are subject to the provisions of subsection 69(1). Under paragraph 69(1)(a), a taxpayer who has acquired a property from a person with whom the taxpayer was not dealing at arm's length for an amount greater than the FMV of the property at the time of its acquisition is deemed to have acquired it for an amount equal to that FMV.
You advised us that the annuitant and the trust that governs the annuitant’s RRSP are not related persons within the meaning of paragraph 251(1)(b), since the trust is described in paragraph (a) of the definition of "trust" in subsection 108(1), thus precluding the application of paragraph 251(1)(b). However, by virtue of paragraph 251(1)(c), it is a question of fact whether persons who are not related to each other deal with each other at arm's length at a particular time. Thus, the fact that the annuitant and his RRSP are not deemed to be related persons under paragraph 251(1)(b) does not mean that they are not otherwise not dealing with each other at arm's length at any particular time within the meaning of paragraph 251(1)(c). The Agency's position is that the annuitant and the trust governing the annuitant's RRSP generally do not deal with each other at arm's length within the meaning of paragraph 251(1)(c). In any event, the very fact that the annuitant is prepared, in order to acquire units of the Co-op from the RRSP, to pay an amount that exceeds their FMV, which is nil - and that the annuitant could in all likelihood only sell those units to a third party subsequently for a nominal value - confirms in our view that the annuitant and the trust governing the RRSP do not deal at arm's length in this transaction.
Thus, to the extent that the annuitant acquired units of the Co-op from the trust governing his RRSP that have a nil FMV, the cost of the units to the annuitant would be deemed to be nil by virtue paragraph 69(1)(a). The excess amount paid by the annuitant to the trust governing the annuitant's RRSP would be treated as a premium, and could result in an over-contribution, with attendant consequences, if the annuitant's "RRSP deduction limit" was not sufficient to permit the annuitant to make such a premium payment to the RRSP. If this were the case, the over-contribution could give rise to a Part X.1 tax.
We hope that these comments are of assistance.
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.