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: How does an individual satisfy the mandated RRSP withdrawal in order to benefit from the transitional relief in subsection 207.05(4) if the prohibited investment is held in a locked-in RRSP?
Position: Several options are available under both income tax law and pension benefits law to mitigate potential adverse tax results.
Reasons: See reply.
February 18, 2013
Sheila Barnard Income Tax Rulings
Individual Returns Directorate Directorate
D. Wurtele
(613) 957-2093
2012-045660
Prohibited investment in locked-in RRSP
We are writing to follow-up on discussions we had with Cynthia Bracewell regarding the application of subsection 207.05(4) of the Income Tax Act (the "Act") in a situation where the prohibited investment is held in a locked-in RRSP. Concern had been expressed that individuals in this situation may have difficulty satisfying the requisite conditions to benefit from the relief afforded by this rule.
Subsection 207.05(4) of the Act sets out a transitional rule that applies in respect of prohibited investments that were held by an RRSP or RRIF on March 23, 2011. It provides that any income earned, and the portion of any capital gains accrued and realized, after March 22, 2011 on these investments will not be subject to the 100% advantage tax in section 207.05 of the Act, but instead will be included in regular income.
To take advantage of this rule, the annuitant must file RC341 Election on Transitional Prohibited Investment Benefit for RRSPs or RRIFs on or before March 1, 2013 (this deadline reflecting a draft amendment released by the Department of Finance on December 21, 2012). The annuitant must also withdraw from their RRSP or RRIF an amount (defined in subsection 207.01(1) of the Act as "transitional prohibited investment benefit") equal to the total of any income earned and capital gains realized in the year on these investments less any capital losses realized in the year on these investments. The amount must be withdrawn within 90 days following the end of the year in which the income or gain was earned or realized except that, under a change proposed by the Department of Finance, the deadline for withdrawing the 2011 and 2012 amounts will be April 2, 2013. The amount of the withdrawal will be treated as a regular RRSP or RRIF withdrawal and will be included in the annuitant's income in the year it is made.
The transitional rule does not distinguish between locked-in plans and regular plans. Consequently, in a situation where the prohibited investment is held in an RRSP or RRIF that is subject to locking-in provisions under pension benefits legislation, the mandated withdrawal must still be made in order to qualify for the transitional relief. However, there are several steps or actions that can be taken to mitigate a potentially adverse tax result.
First, there is nothing in the transitional rule that actually requires the withdrawal to be made from the particular plan in which the prohibited investment is being held. Consequently, the individual could make the withdrawal from their regular RRSP or RRIF if they have sufficient funds.
Second, the individual could swap-out the prohibited investment from the locked-in plan so as to avoid triggering advantage tax on future earnings. This would at least resolve the problem on a prospective basis.
Finally, although the Canada Revenue Agency is not in a position to provide any advice on pension benefits legislation, it is our understanding that the locking-in rules of many jurisdictions allow for locked-in RRSP funds to be transferred to a locked-in RRIF starting as early as age 55 where they become accessible in part. As well, many jurisdictions have relaxed their locking-in rules in recent years to allow some unlocking. Individuals may wish to explore these possibilities further with the applicable pension benefits authority.
I trust this information is helpful.
Mary Pat Baldwin, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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