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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: In a situation where the last annuitant of an unmatured RRSP dies:
1. Can an allowable capital loss incurred in an RRSP be carried back to a prior taxation year and applied against a taxable capital gain?
2. Can a capital loss be carried forward to a subsequent taxation year to apply against a taxable capital gain when the RRSP is claiming a deduction under paragraph 104(6)(a.2) in the subsequent year?
3. Does the non-taxable portion of a capital loss reduce the benefit reported by a beneficiary under subsection 146(8) when the RRSP is wound-up?
Position: 1. Yes. 2. No. 3. No.
Reasons
1. With the exception of paragraph 104(6)(a.2), an RRSP is generally subject to the normal rules in the Act, including the rules regarding the carry-forward and back of allowable capital losses in the computation of taxable income both while it is non-taxable on its taxable income and if it becomes taxable on its taxable income after the death of the last annuitant.
2. The deduction under paragraph 104(6)(a.2) is in computing the trust's income and will include any taxable capital gain realized in the year. A deduction under section 111 is in computing the trust's taxable income. After the paragraph 104(6)(a.2) deduction, there will be no capital gain available against which to apply the capital loss carry forward.
3. Capital losses realized in the RRSP are not relevant in the computation of the benefit taxable on a distribution of RRSP assets to the RRSP beneficiary.
February 27, 2003
Individual Returns and Headquarters
Payments Processing Directorate Income Tax Rulings
Pensions & Trusts Section Directorate
G. Kauppinen
Attention: Pierre Beaudry
2001-009304
Income earned by a Registered Retirement
Savings Plan ("RRSP") after the death of the last annuitant
This is in reply to your e-mail dated July 17, 2001 regarding income earned in an RRSP after the death of the last annuitant. All section references hereinafter are to the Income Tax Act (the "Act").
You ask our opinion regarding several specific questions assuming the following:
1. The last annuitant of a trusteed unmatured RRSP dies in 1998.
2. The fair market value of the property held by the RRSP at the time of the annuitant's death was $15,000.
3. Income (not a capital gain) earned in the RRSP in 1999 is $800.
4. The RRSP realizes a capital gain of $1,000 in 2000.
5. During the period January 1, 2001 to June 15, 2001, the RRSP realizes a capital loss of $600.
6. The RRSP distributes its assets to its beneficiary on June 15, 2001.
7. A taxable capital gain is 50% of a capital gain and an allowable capital loss is 50% of a capital loss (for purposes of the numerical example herein). When it becomes taxable, the RRSP trust's tax rate is 40%.
Your Queries
1. Because an RRSP trust's income earned in a year after the year following the year of death is subject to tax under normal trust rules, can the allowable capital loss of $300 (50% of $600) incurred in 2001 be carried back and applied against the $500 (50% of $1,000) taxable capital gain realized in 2000?
2. If the capital loss had occurred in 2000 and the capital gain in 2001, could the allowable portion of the capital loss be carried forward and applied against the taxable capital gain when the trust will be claiming a paragraph 104(6)(a.2) deduction in 2001?
3. You ask us to confirm that the non-taxable part of the capital loss incurred in 2001 reduces all subsection 146(8) benefits to be reported to the beneficiaries (i.e., the benefits accrued both during and after the trusts exempt period are reduced).
We have addressed your queries in the order in which you have posed them.
Your query #1
Pursuant to subsection 146(4), no tax is payable by an RRSP on the taxable income of the trust for a taxation year unless one of the exceptions in paragraphs 146(4)(a), (b) or (c) applies. Pursuant to paragraph 146(4)(c), if the last annuitant of the plan has died, tax is payable by the RRSP trust on its taxable income for each year after the year following the year in which the last annuitant died. The normal rules in Part 1 of the Act, including the rules regarding the carryback and forward of capital losses, generally apply for the calculation of the trust's taxable income for all the years in which the RRSP exists, whether its income is subject to tax or not (see below, however, where a deduction is taken under paragraph 104(6)(a.2)).
Consequently, in our view, the answer to your 1st question is "yes", such that the $300 allowable capital loss in 2001 can be carried back and applied against the $500 capital gain realized in 2000.
Your query #2
Paragraph 104(6)(a.2) prevents the potential double taxation of income earned by the trust in the year in which all the assets of the RRSP are distributed to a beneficiary.
The RRSP trust is taxable on its income earned in the year pursuant to paragraph 146(4)(c) and the beneficiary is taxable on the FMV of the distribution of all the assets of the RRSP under subsection 146(8), including the trust's income for the year, less certain reductions partially described under our reply to your query #3 below. Paragraph 104(6)(a.2) allows a deduction in computing the trust's income to the extent that the FMV of the distribution of assets by the RRSP would have been income of the trust in the year (calculated under the normal rules in the Act). The income of the trust will include any taxable capital gain realized in the trust in the year of the final distribution of all the assets of the RRSP to the beneficiary. Because of the paragraph 104(6)(a.2) deduction, in the year of distribution, there will not be a taxable capital gain in the trust against which to apply the allowable capital loss carryforward. The paragraph 104(6)(a.2) deduction must be taken before the section 111 capital loss carryforward because the former is a deduction in computing the income of the trust and the latter is a deduction in computing the taxable income of the trust.
Consequently, in our view, the answer to your 2nd query is "no" such that, in the year of distribution, allowable capital loss carryforwards cannot be utilized.
Your query #3
The definition of "benefit" in subsection 146(1) includes any amount received out of or under an RRSP other than, inter alia, under paragraph (a), the fair market value, at the time of the distribution, of the assets (or assets substituted therefore) held at the time of the annuitant's death and, under paragraph (c), an amount, or part thereof, received in respect of the income of the trust under the plan for a taxation year for which the trust was not exempt from tax by virtue of paragraph 146(4)(c).
As stated in our memorandum to you in our file 2001-010826, the reduction under paragraph (a) of the definition requires a "tracking" of the assets held by the RRSP at the time of the death of the last annuitant. Generally, this part of the reduction is limited to the lesser of:
(i) the fair market value of the assets (or assets substituted therefore) of the RRSP, that were subject to tax on the last annuitant's final return at the time of the distribution to the beneficiary of the RRSP, and
(ii) the amount taxed on the last annuitant's final T1.
Generally, (i) will apply if the assets held by the RRSP at the time of the death of the last annuitant have gone down in value and (ii) will apply if the assets have gone up in value.
For further details and examples regarding this part of the computation of the benefit taxable to the beneficiary of the RRSP, see file 2001-010826.
It is the fair market value of the assets distributed to a beneficiary, less, among other things, the reductions described above, which is generally taxable as a benefit to a beneficiary of an RRSP pursuant to subsection 146(8). The computation of taxable capital gains and allowable capital losses are only relevant in the computation of the trust's income. Taxable income earned by the RRSP and how it is computed, is not relevant for purposes of calculating any benefit taxable to the beneficiary with respect to the final asset distribution from the RRSP.
Consequently, in our view, the answer to your 3rd query is "no". Capital losses realized in the RRSP are not relevant in the calculation of the subsection 146(8) benefit that is taxable to the RRSP beneficiary.
We trust the foregoing is of assistance. If there are further questions, please contact Gord Kauppinen at 957-8971.
Roberta Albert, CA
Manager
Deferred Income Plans Section
Income Tax Rulings Directorate
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