Principal Issues: Whether the "transitional prohibited investment benefit" amount that is withdrawn from a registered retirement income fund (RRIF) can be taken into consideration for the carrier obligation to pay the minimum amount?
Position: Yes
Reasons: Legislative analysis. The amount is paid by the carrier to the annuitant.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 16 - Prohibited investment held in a registered retirement income fund ("RRIF")
Since 2011, the federal government has introduced various anti-avoidance measures for investments held through a RRIF. In particular, Part XI.0.1 of the Income Tax Act (the “Act”) has been amended to expand the scope of the concept of "prohibited investment" and "advantage" so that they now apply to a RRIF.
Under section 207.05, where an RRIF annuitant receives an "advantage" from a prohibited investment held in a RRIF account, that RRIF will be subject to a tax of an amount equal to 100% of that advantage " ("advantage tax").
Subsection 207.05(4) provides that if an individual so elects before July 2012 in prescribed form, subsection 207.01(1) does not apply in respect of any advantage that is an amount included in the calculation of the transitional prohibited investment benefit (“transitional benefit”) of the individual for a taxation year. In addition, in order that the individual not be liable to pay tax on the benefit, the amount corresponding to the transitional benefit must be paid to the individual within 90 days after the end of the taxation year. As a result, this transitional benefit will be included in computing the taxpayer's income for the year.
Question to the CRA
Can the amount of the transitional income for a taxation year be the minimum amount that must be paid annually to the annuitant of a RRIF under subsection 146.3(1)?
CRA Response
Under subsection 207.05(4), the advantage tax described in subsection 207.05(1) does not apply in respect of any advantage that is an amount included in the calculation of the transitional prohibited investment benefit of the individual for a taxation year provided that the following conditions are satisfied:
(a) the individual so elects before July 2012 in prescribed form;
(b) the benefit is paid to the individual within 90 days after the end of the taxation year;
(c) the benefit is not paid by way of transfer to another RRIF or registered retirement saving plan of the individual.
However, the Department of Finance has announced that its recommendation that the June 30, 2012 deadline for filing the prescribed form be extended to December 31, 2012.
In short, subsection 146.3(1) defines a retirement income fund ("RIF") as an arrangement between a carrier and an annuitant under which the carrier undertakes to pay amounts to the annuitant the total of which is, in each year, not less than the minimum amount under the arrangement for that year. However, each payment may not exceed the value of the property held in connection with the arrangement immediately before the time of the payment.
The CRA is of the view that an amount withdrawn from a RRIF to benefit from the transitional rule set out in subsection 207.05(4) is an amount that the issuer paid to the annuitant and that may be taken into account in satisfying the minimum amount requirement described in subsection 146.3(1) respecting the RIF.
Catherine Ayotte
(819) 243-7306 / (613) 957-8962
2012-045316