Principal Issues: (a) In order to calculate the minimum amount under a RRIF for a taxation year following the death of the last annuitant of the RRIF, do we use the age that the deceased annuitant had at the beginning of the year of his death, the age that the deceased would have attained at the beginning of the year following the year of his death or the age of the surviving spouse or common-law partner at the beginning of the year that the designated benefit was received?
(b) In the situation where the minimum amount under the RRIF for the year of the annuitant’s death has not been paid and the designated benefit is paid in a subsequent year, is it correct, for the purposes of calculating the eligible amount according to subsection 146.3(6.11), that only the minimum amount for the year in which the surviving spouse has received the designated benefit will be deducted?
Position: (a) Unless at the time the RRIF was set up the annuitant elected to use the spouse or common-law partner’s age, the minimum amount will be determined according to the age that the deceased annuitant would have attained at the beginning of the year that the designated benefit is received.
(b) Yes.
Reasons: (a) The "minimum amount" as defined in subsection 146.3(1) is calculated as the total fair market value of all properties held in connection with the RRIF at the beginning of the year multiplied by the prescribed factor corresponding to the age of the annuitant or where the annuitant so elected, the annuitant spouse or common-law partner. The prescribed factor for the year is the factor listed in paragraphs 7308(3) or (4) of the Regulations, which corresponds to the age in whole years that the individual attained at the beginning of that year or that would have been so attained by the individual if he had been alive at the beginning of the year that the designated benefit was received.
(b) The eligible amount according to subsection 146.3(6.11) is calculated by excluding the portion of the minimum amount under the RRIF for the year in which the surviving spouse has received the designated benefit pursuant to subsection 146.3(5). Where the annuitant has died in a previous year, the amount that may be transferred must be reduced by the minimum amount as calculated for the year in which the surviving spouse has received the designated benefit.
FINANCIAL STRATEGIES AND FINANCIAL INSTRUMENTS ROUNDTABLE, 11 OCTOBER 2019
2019 APFF CONFERENCE
Question 8
Minimum Withdrawal from a Registered Retirement Income Fund and Death of a Taxpayer
Responses to a question posed at this Roundtable at 2016 Association de planification fiscale et financière ("APFF") Conference regarding minimum withdrawals from a deceased taxpayer's Registered Retirement Income Fund ("RRIF") and the transfer of the RRIF to the surviving spouse raise other questions to which we would appreciate responses from the Canada Revenue Agency (the "CRA").
To commence with a brief review, Monsieur died in November of a year and bequeathed his entire RRIF to his surviving spouse. As part of its response, CRA indicated that even if a taxpayer had died and had already withdrawn the minimum amount prior to the taxpayer’s death, the transfer to the surviving spouse's RRIF (or to the registered retirement savings plan ("RRSP") if the surviving spouse was under 72 years of age) would occur the following year; the amount that could be transferred on a tax-free basis to the surviving spouse's RRIF (or RRSP) was to be reduced by the minimum withdrawal for that following year, according to the formula in subsection 146.3(6.11). In short, where the minimum withdrawal was made before death, if the transfer was made to the surviving spouse's RRIF (or RRSP) in the same calendar year as the death, the amount that can be transferred tax-free to the surviving spouse's RRIF (or RRSP) will be greater. In the case of a surviving spouse who is younger than the deceased and who can transfer the amounts to an RRSP, this may result in higher taxation for the surviving spouse simply because the transfer was made in the calendar year following the death. Moreover, a death can occur at the beginning of a calendar year as well as at the end of a calendar year. It is difficult to understand why the taxation of the surviving spouse should be different in such a situation. The impact of the minimum withdrawal would occur both in the year of death and in the subsequent year.
Questions to the CRA
a) When calculating the minimum withdrawal for the year after death from the deceased's RRIF, should the deceased's age on January 1 of the calendar year of death, the age of the deceased on January 1 of the year after death, or the surviving spouse's age on January 1 for the year of transfer to his or her RRSP/RRIF, be used?
b) If the individual dies before the individual has made the minimum withdrawal for the year, but the transfer of the RRIF value to the surviving spouse's RRIF does not occur until the subsequent calendar year, is it correct that the impact of the minimum withdrawal from the deceased's RRIF will be borne only once, i.e., for the year subsequent to the year of death?
CRA Response to Question 8(a)
The calculation of the minimum amount under the RRIF for the year is provided in the definition of "minimum amount" in subsection 146.3(1). Generally, the minimum amount under the arrangement for a year is the FMV of property held in connection with the RRIF at the beginning of the year (footnote 1), multiplied by a prescribed factor for the year.
Under Element B of the definition of "minimum amount" in subsection 146.3(1), the prescribed factor can correspond to the age of the first annuitant under the RRIF, or if the first annuitant so elects before the issuer makes a payment out of the RRIF, the age of the spouse or common-law partner at the time of the election. The prescribed factor for the year is the factor in the table, as applicable, in subsections 7308(3) and (4) of the Income Tax Regulations (footnote 2) that corresponds to the age in whole years attained by the individual at the beginning of that year or that would have been so attained by the individual if the individual had been alive at the beginning of that year.
As stated in Question 2 of the 2016 APFF Financial Strategies and Instruments Roundtable (footnote 3), for purposes of calculating the eligible amount determined under subsection 146.3(6.11), the taxation year referred to in that subsection is the taxation year referred to in paragraph 60(l), i.e., the year of the inclusion of the designated benefit in computing the income of the spouse or common-law partner income under subsection 146.3(5).
Thus, in a situation where the prescribed factor is the age of the first annuitant of the RRIF, the minimum amount for the year, as set out in B and C of the formula in subsection 146.3(6.11), is based on the age in whole years that the deceased annuitant would have attained at the beginning of the year had he or she been alive in the taxation year in which the designated benefit was included in computing the income of the spouse or common-law partner.
CRA Response to Question 8(b)
The term "retirement income fund" is defined in subsection 146.3(1) as an arrangement between a carrier and an annuitant under which, in consideration for the transfer to the carrier of property, the carrier undertakes to pay amounts to the annuitant and, where the annuitant so elects, to the annuitant’s spouse or common-law partner after the annuitant’s death. In each year, the carrier must pay amounts totalling at least the minimum amount under the arrangement for the year, but each payment may not exceed the value of the property held under the RRIF immediately before the time of the rollover payment. The definition of "minimum amount" in subsection 146.3(1) of the Income Tax Act requires that payments begin no later than the first calendar year following the year in which the RRIF arrangement was entered into.
There is therefore no requirement for a RRIF issuer to pay the minimum amount by withdrawing from a retirement income fund after the death of the last annuitant.
Subsection 146.3(6.11) determines the eligible amount that may be claimed by inter alia the spouse or common-law partner of the last annuitant under a RRIF, for the purpose of subparagraph 60(l)(v). The eligible amount is the portion of the designated benefit that is included in computing the income of the spouse or common-law partner under subsection 146.3(5) for the year less a specified proportion of the designated benefit. That specified proportion is equal to the minimum amount (footnote 4) to be withdrawn from the RRIF for the year, other than a portion of that amount that was included in computing the annuitant's income for the year under the RRIF, divided by the total of the designated benefits for the RRIF for the year.
Thus, the eligible amount determined under subsection 146.3(6.11) that may be deducted in computing the income of the spouse or common-law partner under paragraph 60(1), provided the conditions set out in that paragraph are satisfied, is calculated excluding the portion of the minimum amount to be withdrawn out of the RRIF that was not paid in the year where the spouse or common-law partner has received the designated benefit under subsection 146.3(5).
Where the designated benefit is received by the spouse or common-law partner in the year following that of the death of the last annuitant of a RRIF, the eligible amount will be equal to the designated benefit after deducting the minimum amount to be withdrawn from the RRIF for the year in which the benefit is received.
Nathalie Boyer
(450) 926-7039
October 11, 2019
2019-081190
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 With the exception of annuity contracts held by a trust governed by a RRIF.
2 C.R.C., c. 945.
3 CANADA REVENUE AGENCY, Technical Interpretation 2016-0651711C6, October 7, 2016.
4 Under the definition of this term in subsection 146.3(1).