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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: 1) When there is a transfer of a small business property from one RRSP trust to another of the same annuitant, or from an RRSP to a RRIF trust of the same annuitant, does the transferee trust obtain a "small business property"? 2) Is the transferor's "cost amount" preserved as the "cost amount" to the transferee for purposes of calculating the "small business investment amount"? 3) Would the answers to 1) and 2) be the same if the transferee trust received only a portion of the transferor's property or already held its own property before the transfer?
Position: 1)Yes; 2) Yes; 3) Yes transferee would obtain a "small business property" and, yes, generally property's cost would be preserved.
Reasons: 1) The definition of "small business property" is proposed to be amended to allow certain inter-plan trust transfers by a single annuitant or between such trusts of spouses and not lose the 3-for-1 bump in foreign property room. 2) The "cost amount" to the transferee will generally be the cost to the transferor trust for one of two reasons: (a) because it is the position of the Agency as expressed in IT-412R2 that wholesale transfers of property between RRSP trusts of the same annuitant do not result in a change in trust ownership - a disposition - and therefore occur at cost; or (b) because of proposed amendment to exclude wholesale transfers of property between or among RRSP or RRIF trusts of the same annuitant from the definition of "disposition" [proposed paragraph(g) of subsection 248(1) definition; 3) a transfer of a single small business property does not cause it to lose its status as a small business property under the proposed definition of "small business property" and although it will be a "disposition", the proposed amendments to 107.3(1),(2),(3) generally result in these transfers between trusts of the same annuitant occurring at cost.
XXXXXXXXXX
Attention: XXXXXXXXXX 2000-001660
M. P. Baldwin
June 30, 2000
Dear Sirs:
Re: Small Business Investment Amount
This is in reply to your facsimile of March 24, 2000 in which you request an interpretation with respect to the definition of "small business investment amount" in subsection 206(1) of the Income Tax Act (the "Act").
A registered retirement savings plan (RRSP) trust or registered retirement income fund (RRIF) trust (hereinafter referred to as "trust") which invests more than 20% of the total cost of its assets in foreign property is subject to a 1% monthly tax with respect to its foreign assets in excess of the 20% limit. Paragraph 206(2)( c) of the Act, allows a trust to increase its foreign property limit by as much as 20% of the cost amount of all its property (to a maximum of 40%) where the trust has a "small business investment amount". The increase to the foreign property limit is three times the small business investment amount (to a maximum of 20% of cost). For example, if a trust holds an investment that qualifies as a small business property and its cost is equal to 5% of the cost amount of all the trust's property, the trust will have a foreign property limit of 35%, that being the basic 20% amount plus 15% (3 times 5%).
The term "small business investment amount" is defined under subsection 206(1) of the Act and, for any month, is computed with reference to the average cost of all "small business property" held at the end of each of the previous three months. However, in September 1999, the Department of Finance released draft legislation proposing to amend the definition of "small business investment amount" for months that end after 1997 so that it will be the greater of the three month average described above and the total of the cost amounts of all small business properties to the taxpayer at the end of the month.
The intent of this amendment is to ensure that the "small business investment amount" at any time is, in all cases, not less than the trust's total cost amount of small business properties at the end of the month.
The term "small business property" is also defined in subsection 206(1) of the Act. Presently, property may qualify as small business property of a trust where the trust is the first person to have acquired the property (other than a broker or dealer in securities) and has owned the property continuously since it was so acquired.
The September 1999 release also proposes to amend the definition of "small business property" to permit a "small business property" to be transferred within non-arm's length groups without causing the property to lose its status as a "small business property" for purposes of the "small business investment amount" calculation. Paragraph (f) of the definition is proposed to read as follows:
"(f) throughout the period that began at the time the property was first acquired (otherwise than by a broker or dealer in securities) and ends at the particular time, the property was not owned by any person other than
(i) the taxpayer,
(ii) a trust governed by a particular registered retirement income fund or registered retirement savings plan if
(A) the taxpayer is another trust governed by a registered retirement income fund or registered retirement savings plan, and
(B) the annuitant under the particular fund or plan (or the spouse or former spouse of that annuitant) is also the annuitant under the fund or plan referred to in clause (A), or
(iii) an annuitant under a registered retirement income fund or registered retirement savings plan that governs the taxpayer or a spouse or former spouse of that annuitant;
The above proposed amendment to the definition of "small business property" will allow certain inter-plan trust transfers ( for example, RRSP trust to RRIF trust) by a single annuitant or between such trusts of spouses so that the transferee trust will obtain the 3-for-1 bump in foreign property room based on the cost amount of the particular small business property received. This proposed amendment will also apply for months ending after 1997.
With respect to your question whether the above proposed amendment will apply when only a portion of the assets is transferred as opposed to all the assets of the trust, it is our opinion that the proposed amendment to paragraph (f) above will apply when the transferor trust transfers one or more of its small business properties.
However, the "cost amount" of the particular transferred small business property to the transferee trust may be either the "cost amount" of such property to the transferor trust ( extending, if applicable, to the cost amount to the transferor of the particular small business property for the three preceding months) or the fair market value of the particular property at the time of the transfer.
To explain, paragraph 12 of Interpretation Bulletin IT-412R2 ("Foreign Property of Registered Plans") comments on transfers of property between RRSP trusts. Provided that there is no change in the annuitant, the transfer of all of the property of a trust of an unmatured self-administered RRSP from one trustee to another pursuant to subsection 146(16) of the Act does not constitute a disposition or acquisition for the purposes of subsection 206(1) and (2) of the Act. If the conditions are met, the cost of all properties will remain constant and therefore the penalty tax in subsection 206(2) of the Act will not apply solely as a result of the transfer.
Please note that this paragraph applies to transfers of all the property in one self-administered RRSP trust to another self administered RRSP trust of the same annuitant. It does not apply in situations where a partial transfer is made, nor does it apply to transfers between or to RRIFs, or to transfers to RRSPs or RRIFs of the annuitant's spouse.
However, on June 5, 2000 the Department of Finance released a Notice of Ways and Means Motion to introduce amendments, which will apply to the transfer of property between RRSP trusts of the same annuitant, between RRSP and RRIF trusts of the same annuitant, and between RRIF trusts of the same annuitant.
With respect to transfers of property made after December 31, 1999, a transfer of all the property in one trust to another trust of the same annuitant will not be treated as a disposition where the conditions in proposed paragraph (g) of the definition of "disposition" in subsection 248(1) are met and an election is not made to the contrary. Therefore, the cost amount of the small business properties and all other properties will be preserved.
In cases where proposed paragraph 248(1)(g) "disposition" definition does not apply (for example, where only a partial transfer of properties occurs between trusts of the same annuitant) the transfer may be considered to be a "qualifying disposition" pursuant to proposed subsections 107.4(1),(2) and (3). The intent of these proposed subsections is that generally the cost amount of the property to the transferee is the cost amount to the transferor of the same property unless the transferee elects that the cost be the fair market value at the time of its transfer and the election is not made for the purpose of avoiding Part XI tax.
We trust that the above comments will be of assistance to you. The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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