11 October 2013 Roundtable, 2013-0495281C6 F - Question 9 - APFF Round Table
Principal Issues: Whether the CRA's comments in the technical interpretation 2002-0141355 are still valid?
Position: Yes, except our comments related to the S.I.N. requirement for a non-resident in order to be the annuitant of a RRSP and our comments related to the application of subparagraphs 212(1)(l)(i) and (ii) and 212(1)(q)(i) and (ii). A non-resident annuitant must provide a S.I.N. to the issuer of a RRSP who is required to prepare an information return pursuant to the subsection 214.1(1) of the Income Tax Regulations. If the surviving spouse is named as the beneficiary of the deceased's estate, the exceptions in paragraphs 212(1)(l) and 212(1)(q) are generally not satisfied and the payment out of the RRSP is subject to Part XIII withholding. However, when the legal representative and the spouse, as beneficiary of the estate, jointly direct that the amount that would otherwise be paid to the estate be transferred by the payer directly to a RRSP, a RRIF or a qualified annuity under which the surviving spouse is the annuitant, the CRA will generally accept that such amount be exempt from Part XIII withholding, provided that the requirements of subparagraphs 212(1)(l)(i) and (ii) or 212(1)(q)(i) and (ii), as the case may be, are satisfied.
Reasons: Application of the Act, the Income Tax Regulations and previous interpretations.
Financial Strategies and Financial Instruments Roundtable, 11 October 2013
2013 APFF Conference
Question 9
Rollover on death of an RRSP/RRIF to an RRSP/RRIF of a person not resident in Canada
Tax consequences of the death of an RRSP annuitant
Upon the death of the annuitant of a registered retirement savings plan ("RRSP"), the fair market value ("FMV") of the RRSP property is included in the deceased's final return by the application of subsection 146(8.8). If the RRSP assets are paid to the spouse as a result of the death and the other conditions in the definition "refund of premiums" in subsection 146(1) are satisfied, a deduction will be allowed in the return of the deceased pursuant to subsection 146(8.9). The spouse who receives an amount designated as a refund of premiums must include it in his or her income under subsection 146(8.91) and may, if the conditions of paragraph 60(l) are satisfied, contribute to and deduct, in whole or in part, the amount to an RRSP/RRIF of which he or she is an annuitant, or purchase an annuity.
Tax consequences upon death of the annuitant of a RRIF
Upon the death of the annuitant of a registered retirement income fund ("RRIF"), the FMV of the RRIF property is included in the deceased's final return by the application of subsection 146.3(6). If the RRIF's assets are paid to the spouse as a result of the death and the other conditions in the definition "designated benefit" in subsection 146.3(1) are satisfied, a deduction will be allowed in the return of the deceased pursuant to subsection 146.3(6.2). The spouse who receives the amount designated as a "designated benefit" must include it in his or her income under subsection 146.3(6.1) and may, if the conditions of paragraph 60(l) and subsection 146.3(6.11) are satisfied, contribute to and deduct, in whole or in part, the amount to an RRSP / RRIF of which he or she is an annuitant, or purchase an annuity.
Tax consequences of death to a non-resident RRSP/RRIF annuitant
Generally speaking, under paragraph 212(1)(l) (for the imposition of Part XIII tax), an RRSP payment to a non-resident will be subject to Canadian tax of 25% (a non-resident withholding tax). The application of paragraph 212(1)(l) requires that an RRSP payment be made to a non-resident. Consequently, paragraph 214(3)(c) and subsection 214(3.1) cause an amount to be deemed to have been received under subsection 146(8.8) and have been paid to the non-resident for the purposes of Part XIII (and, in particular, for the purpose of paragraph 212(1)(l)). Consequently, following the application of the above provisions of the Act, a non-resident would be deemed to have made a "deemed withdrawal" and received a payment of all assets from his or her RRSP immediately prior to his or her death. Thus, a tax of 25%, in the form of withholding tax, would be applicable. Where this tax is applicable, the non-resident will receive an NR4 slip showing the gross payment and the amount of the withholding tax.
It should be noted that the Tax Agreement between Canada and the non-resident's country of residence (if any) may, in specific situations (for example, payment of dividends or earnings), reduce the tax rate of Part XIII tax (i.e. reduce the rate of 25%). However, the Tax Conventions of Canada generally reduce the tax rate only to 15% for a periodic pension/annuity payment (and not for a lump sum).
Finally, it is possible for the non-resident to elect, by virtue of section 217, to be taxed under Part I instead of Part XIII when receiving amounts from an RRSP (or RRIF) and potentially reduce the tax rate of 25%.
Surviving spouse who is a non-resident of Canada
In a situation where the surviving spouse does not reside in Canada, it is possible for the surviving spouse to open an RRSP or RRIF to which the deceased spouse's RRSP amounts can be transferred. The rollover will be allowed either through the application of Part I (as described above) if the election under section 217 is made, or through the application of the exception in paragraph 212(1)(l) which provides for the direct transfer of the deceased's RRSP to the surviving spouse's RRSP/RRIF or to acquire an annuity for the surviving spouse.
The conditions for the exception in paragraph 212(1)(l) apply to the portion of the payment that:
1- has been transferred by the payer on behalf of the non-resident person pursuant to an authorization in prescribed form to an RRSP/RRIF or to acquire an annuity; and
2- would be deductible in computing the income of the non-resident person for the year by virtue of paragraph 60(l) if the non-resident person had resided in Canada throughout the year.
We refer you in this regard to an August 6, 2002 Technical Interpretation (2002-0141355).
In the August 6, 2002 Technical Interpretation (2002-0141355), the CRA confirmed that an RRSP can be transferred to the RRSP of a surviving spouse who is not resident in Canada. The CRA also stated that the non-resident spouse would be able to open an RRSP, even if he or she does not have a Social Insurance Number ("SIN").
Question 9(a)
Is the CRA's position still the same regarding the possible transfer of an RRSP from a deceased person to the RRSP/RRIF or a non-resident surviving spouse?
CRA response to Question 9(a)
It should be noted that all our comments are based on the premise that the issues raised relate to an unmatured RRSP upon the annuitant's death.
Our general comments in Technical Interpretation 2002-0141355 regarding the transfer of an unmatured RRSP upon the annuitant's death to the non-resident spouse are still valid, except with respect to the tax-free direct transfer provisions in subparagraphs 212(1)(l)(i) and (ii). We refer you to our answer to Question 2 below.
With respect to the transfer of an RRSP to a non-resident surviving spouse before the plan matures, it should be noted that subsection 146(8.8) deems the annuitant of an RRSP to have received, immediately before death, an amount as a benefit under the plan. This amount must be included in the income of the deceased annuitant under subsection 146(8).
Subsection 146(8.9) reduces the deemed benefit received by the deceased annuitant under subsection 146(8.8) where the amount qualifies as a "refund of premiums" within the meaning of subsection 146(1). If the annuitant died before the plan matures and the amount is paid under the RRSP as a result of his or her death to an individual who, immediately before the annuitant's death, was his or her spouse or common-law partner, this amount is generally a refund of premiums.
Where an amount under an unmatured RRSP of a deceased annuitant is paid to the deceased's legal representative and the surviving spouse is the beneficiary of the estate, we consider that the spouse did not receive the amount in the RRSP due to the annuitant's death and the payment does not constitute a refund of premiums as defined in subsection 146(1). In such a situation, subsection 146(8.1) deems the amount paid to the deceased annuitant's legal representative as being received by the surviving spouse as a benefit that is a refund of premiums, and not by the legal representative, to the extent that the amount would have been a refund of premiums if it had been paid under the plan to the beneficiary spouse of the annuitant's estate and that it is designated jointly by the legal representative and the surviving spouse in prescribed form T2019 (footnote 1) filed with the Minister.
The amount qualifying as a refund of premiums is a benefit for the recipient spouse who receives it, or is deemed to have received it, and it must be included in computing his or her income pursuant to subsection 146(8) and paragraph 56(1)(h). An amount equal to the refund of premiums may be deducted in computing the spouse's income under paragraph 60(l) to the extent that it is paid by or on behalf of the spouse in the year or within 60 days after the end of the year as a premium under an RRSP, RRIF or for an eligible annuity of which the surviving spouse is the annuitant.
Question 9(b)
Is the CRA's position still the same regarding the possibility for an individual who is not resident in Canada to open an RRSP even if he or she does not have a SIN?
CRA response to Question 9(b)
The position expressed in our Technical Interpretation letter 2002-0141355 regarding the need for a non-resident to hold a SIN in order for his deceased spouse's RRSP to be transferred on his or her behalf to an RRSP of which he or she is the annuitant must be revised as follows.
The CRA's policy regarding the holding of a SIN in the above situation is set out in paragraphs 9(a) and 22(a) of Information Circular 72-22R9 (footnote 2) and has been commented on as part of the Roundtable at the May 2007 Conference of the Canadian Life and Health Insurance Association.
In this particular situation, it is our view that the holding of a SIN by the non-resident spouse is necessary in order to proceed with the registration of an RRSP of which he or she is the annuitant and to file the information return required by virtue of subsection 214.1(1) of the Income Tax Regulations (the "ITR"). Indeed, it is our understanding that a surviving spouse is required, pursuant to subsections 237(1.1) and 214.1(1) ITR, to provide a SIN to the issuer of an RRSP who, in the year of the transfer of a refund of premiums to which paragraph 60(l) applies, must complete an information return in prescribed form with respect to amounts paid as contributions under the plan.
Question 9(c)
Is the position of the CRA the same in (a) and (b) above with respect to the transfer of a RRIF to a non-resident person? Note that it appears that the CRA's current position requires that the RRIF annuitant be in possession of a SIN for the filing of required information to be provided by financial institutions to the authorities.
CRA response to Question 9(c)
Our positions relating to the transfer of a RRIF to a non-resident surviving spouse are similar to those in (a) and (b) above regarding the transfer of an RRSP at death.
Specifically, where the last annuitant under a RRIF dies, that annuitant is deemed under subsection 146.3(6) to have received, immediately before death, an amount out of or under the fund equal to the FMV of the property of the fund at the time of the death. This amount must be included in the income of the deceased annuitant pursuant to subsection 146.3(5).
Subsection 146.3(6.2) reduces the deemed benefit received by the deceased annuitant under subsection 146.3(6) where the amount is a "designated benefit" within the meaning of subsection 146.3(1). Amounts that would qualify as a refund of premiums if the fund was an unmatured RRSP before the annuitant's death and are paid to the spouse of the annuitant generally constitute designated benefits.
In addition, where an amount out of the RRIF of a deceased annuitant is paid to the deceased's legal representative and the surviving spouse is the beneficiary of the estate, subsection 146.3(6.1) deems the amount received by the legal representative of the last annuitant under the fund to be received by the surviving spouse to the extent that, on the one hand, the amount would have been a refund of premiums if it had been paid, under the plan, to the beneficiary spouse of the annuitant's estate and that, on the other hand, it is jointly designated by the legal representative and the surviving spouse in the prescribed T1090 form (footnote 3) filed with the Minister as required by the definition of "designated benefit" in subsection 146.3(1).
An amount that qualifies as a designated benefit is a benefit to the spouse beneficiary who receives it, or is deemed to have received it, and the spouse must include it in computing income pursuant to subsection 146.3(5) and paragraph 56(1)(t). This amount may be deducted in computing the spouse's income under paragraph 60(l) to the extent that an amount equal to the sum of the amounts included as a refund of premiums is paid by or on behalf of the spouse in the year or within 60 days after the end of the year as premium under an RRSP, RRIF or for an eligible annuity of which the surviving spouse is the annuitant.
The requirement to hold a SIN in order to register a RRIF is explicitly included in the definition of the term "RRIF" provided in subsection 146.3(1).
Question 9(d)
The CRA also stated in this Interpretation that, in order to meet the conditions in subparagraphs 212(1)(l)(i) and (ii), the spouse must be designated as a beneficiary under the RRSP contract and not in the will. However, note that in many situations a beneficiary designation in an RRSP/RRIF contract is not always possible or valid. For example, in Quebec, the C.C.Q. does not permit beneficiary designations in an RRSP/RRIF contract other than those held by an insurance company or through certain trust companies. Also, when the annuitant becomes a non-resident, depending on the law applicable in his or her country of residence, the beneficiary designation may not be valid. Is the position of the CRA always the same, and if so, can it explain its position on the interpretation of paragraph 212(1)(l) more precisely?
CRA response to Question 9(d)
Under the provisions of paragraph 212(1)(l), a non-resident must pay an income tax of 25% (or a lower rate, depending on any applicable tax treaty) on amounts paid or credited to, or deemed to be paid or credited to, the non-resident by a resident of Canada as a payment under an RRSP to the extent that, pursuant to section 146, the amount received would have been included in the non-resident's income if he or she had been resident in Canada.
Paragraph 214(3)(c) provides that an amount that would be included in a taxpayer's income, including because of subsection 146(8.1), had the taxpayer been resident in Canada, is deemed to have been paid to the taxpayer as a payment under an RRSP. This amount is therefore subject to Part XIII tax pursuant to paragraph 212(1)(l), except where the amount has been directly transferred by the payer, on behalf of the surviving spouse, into an RRSP or RRIF of which the spouse is the annuitant or in order to purchase an eligible annuity contract and to the extent that the amount so transferred would have been deductible under paragraph 60(l) if the non-resident spouse had resided in Canada throughout the year. To be valid, the transfer must be authorized by the prescribed NRTA1 form (footnote 4). The non-resident spouse may thereby claim the deduction provided for in paragraph 60(l) without being subject to tax under the rules set out in paragraph 212(1)(l).
With respect to the payment made as a result of the death of the spouse of a non-resident who has not been designated as a beneficiary in the RRSP contract but who is the beneficiary of the deceased spouse's estate, we are of the view that the tax-neutral transfer provisions in subparagraphs 212(1)(l)(i) and (ii) generally cannot be applied since the payment should generally be made under the deceased annuitant's RRSP to the legal representative of the deceased annuitant and not directly transferred to an RRSP of which the surviving spouse is the annuitant.
Notwithstanding the foregoing, to the extent permitted by the provisions of the will, we will, however, accept that the sums paid by the issuer, in accordance with the joint instructions of the legal representative of the deceased annuitant and the surviving spouse, directly to the RRSP or RRIF of the surviving spouse or for the purchase of a qualifying annuity of which he or she is the annuitant, cannot be subject to Part XIII tax pursuant to subparagraphs 212(1)(l)(i) and (ii).
Question 9(e)
Upon the death of a RRIF annuitant, Part XIII does not appear to provide an exemption similar to that provided for an RRSP (paragraph 212(1)(l)) under which no tax is imposed when the funds are transferred to the RRSP or RRIF of the non-resident surviving spouse. Thus, in this situation, in order to benefit from the rollover to an RRSP or RRIF for the non-resident spouse, only the election in section 217, which allows the choice of applying Part I instead of Part XIII, seems available.
Is our understanding accurate?
CRA response to Question 9(e)
Under paragraph 212(1)(q), any payment out of or under a RRIF that would, if the non-resident person had been resident in Canada throughout the taxation year in which the payment was made, be required by section 146.3 to be included in computing the non-resident person’s income for the year is subject to an income tax rate of 25%.
An amount that would be required to be included in a taxpayer's income, including because of subsection 146.3(6.1), if resident in Canada, is deemed to have been paid to the taxpayer as a payment under a RRIF by virtue of paragraph 214(3)(i). This amount is therefore subject to Part XIII tax pursuant to paragraph 212(1)(q), except where the amount has been directly transferred by the payer, on behalf of the surviving spouse, into an RRSP or RRIF of which the surviving spouse is the annuitant or for the purpose of purchasing an eligible annuity contract and to the extent that the amount so transferred would have been deductible under paragraph 60(l) if the non-resident spouse had resided in Canada throughout the year. To be valid, the transfer must be made under an authorization in the prescribed NRTA1 form.
The provisions of subsection 212(1)(q) are similar to those in subsection 212(1)(l) and the above comments regarding RRSP payments may be applicable, in particular, with respect to the payment made as a result of the death of the spouse of a non-resident who has not been designated as a beneficiary in the RRSP contract, but who is instead the beneficiary of the deceased spouse's estate.
Marie-Claude Routhier
2013-049528
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CANADA REVENUE AGENCY, Death of an RRSP Annuitant - Refund of Premiums for the year 20__.
2 CANADA REVENUE AGENCY, Information Circular 72-22R9, Registered Retirement Savings Plans, June 17, 1996.
3 CANADA REVENUE AGENCY, Death of a RRIF Annuitant - Designated Benefit for the year 20__.
4 CANADA REVENUE AGENCY, Authorization for Non-Resident Tax Exemption