26 January 2005 Ministerial Correspondence 2004-0107411M4 - Worthless property held in an RRSP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: The taxpayer requested clarification on how to remove shares from an RRSP where the shares have declined in value and there is no market value for the shares.

Position: We provided our general comments on how to remove such property from an RRSP. We cannot advise what the fair market might be nor what approximation of that fair market value would be acceptable.

Reasons: The value of a share is a question of fact.

Signed on January 26, 2005

XXXXXXXXXX

Dear XXXXXXXXXX:

Mr. Michel Dorais, Commissioner of the Canada Revenue Agency, has asked me to reply to your correspondence of November 12, 2004, addressed to his predecessor, Mr. Alan Nymark, regarding the removal of shares from a registered retirement savings plan (RRSP).

The shares of a corporation may be withdrawn from an RRSP or sold to another party. When shares of a corporation are withdrawn from an RRSP by the annuitant, an amount equal to the fair market value (FMV) of the shares at that time has to be reported on a T4RSP, Statement of RRSP Income, and included in the annuitant's income. When the property is sold to a person dealing with the RRSP at arm's length, the property is removed from the RRSP's records and the agreed-upon proceeds added to the RRSP. However, when the property is sold to the annuitant of the RRSP or to a person who is not dealing with the RRSP or the annuitant at arm's length, the proceeds of the disposal should be equal to the FMV of the property at the time of the disposal or certain unintended consequences could arise. For example, if the property is sold for less than the FMV, the difference would need to be included in the annuitant's income for the year. Alternatively, if the property is sold for more than its FMV, the excess will be considered a gift or a contribution to the RRSP and could be subject to an additional tax.

The term "fair market value" is not defined in the Income Tax Act. It takes on its ordinary meaning in its application under the Income Tax Act. Generally, a property's FMV is the amount at which property would exchange hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. Consequently, the determination of the FMV of any property is a question of fact.

The FMV of a public corporation's shares is normally the trading price of the share on the date of the transfer. However, when there is no open market for the particular share or there are no trades for a significant period before and after that date, the FMV can only be determined after a review of all the relevant trading information available at that time. The Valuations Unit of the relevant tax services office is responsible for determining whether the FMV of a specific share is reasonable in any particular circumstances. Accordingly, should you wish to obtain further clarification on this matter, I invite you to contact Ms. Lisa McDonald, an official of the Southern Interior (Penticton) Tax Services Office, by calling 0-250-492-9300 collect.

I appreciate the opportunity to address your concerns.

							Yours sincerely,

							Ed Gauthier
							Deputy Assistant Commissioner
							Tax and Regulatory Affairs
							Policy and Planning Branch
Wayne Harding
957-9769
January 4, 2005
2004-010741