Principal Issues: 1. How is the cost of property that is distributed in-kind from an RPP to a member determined? 2. Whether the in-kind distribution of the property will result in Part I tax payable by a trusteed RPP.
Position: 1. The FMV of the property at the time of distribution is the cost of the property to the member. 2. No.
Reasons: 1. Subsection 52(1) sets out the rules for determining the cost of certain property. 2. Paragraph 149(1)(o) exempts the income of a trusteed RPP from Part I tax.
XXXXXXXXXX D. Odubella 2021-091408
December 22, 2021
Dear XXXXXXXXXX:
RE: Registered Pension Plan In-Kind Distribution
We are writing in response to your email of September 3, 2021, regarding the income tax treatment of the distribution of surplus from an individual pension plan (IPP). We understand that the administrator of the IPP wants to distribute the surplus by making an in-kind distribution of property of the IPP to the sole member of the IPP. You asked the CRA to confirm the following:
1. the cost to the member of property received from the IPP as a result of the in-kind distribution; and
2. whether the in-kind distribution of the property will result in Part I tax payable by the IPP.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R11, Advance Income Tax Rulings and Technical Interpretations.
Subsection 8300(1) of the Income Tax Regulations defines an IPP as a registered pension plan (RPP) that meet certain conditions. Although your questions are posed in the context of an IPP, they are relevant to any in-kind distribution from an RPP. Accordingly, we will address the questions in the broader context of an RPP. For purposes of this letter, we have assumed that the funding media of the RPP is a trust.
In-kind distribution from an RPP
Generally, payments received from an RPP are “superannuation or pension benefits” and included in the income of the recipient under subparagraph 56(1)(a)(i) of the Act. Property that is distributed in-kind by an RPP to a member is a superannuation or pension benefit.
An RPP and a member are separate and distinct entities for income tax purposes. As a result, an in-kind distribution by the RPP to the member will be considered a “disposition,” as defined in subsection 248(1) of the Act, of the property by the RPP and an acquisition of the property by the member. The disposition and acquisition will occur at the fair market value (FMV) of the property at the time of the distribution. The member will be treated as having received a pension benefit equal to the property’s FMV at the time of the distribution and must include this amount in computing their income.
Cost of property acquired by member
In general, subsection 52(1) of the Act provides that, where an amount in respect of the value of a property has been included in computing a taxpayer’s income, that amount is added in determining the cost to the taxpayer of the property for purposes of determining capital gains and losses in respect of the property. Since the RPP member pays no consideration for the property received from the RPP, the cost to the member of the property is simply equal to the FMV of the property that is included in computing the member’s income.
Income of RPP
Paragraph 149(1)(o) of the Act exempts a trust governed by an RPP from tax under Part I of the Act. Therefore, any taxable capital gain arising from the disposition of the property distributed from the RPP to the member will not give rise to any Part I tax to the RPP trust.
We trust our comments will be of assistance.
Yours truly,
Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch