25 February 2003 Internal T.I. 2001-0108267 - 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.

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: How is the benefit to a beneficiary of an RRSP calculated when the final distribution of assets held by the RRSP occurs before the time that the RRSP has become taxable and income has been earned in the RRSP continuously since the death of the last annuitant thereof?

Position: Assuming certain paragraphs in the definition of "benefit" in subsection 146(1) do not apply, the benefit which is usually taxable to the RRSP's beneficiary is the fair market value of the assets of the RRSP received by the beneficiary reduced by the fair market value of assets (or assets substituted therefore) which were held by the RRSP at the time of the death of the last annuitant. However, this reduction cannot exceed the amount taxed at the time of the death of the last annuitant of the RRSP.

Reasons: Subsection 146(8) and the definition of "benefit" in subsection 146(1).

		February 25, 2003

	Individual Returns and Payments	Head Office
	  Processing Directorate	Income Tax Rulings
	Pensions & Trusts Section	  Directorate
G. Kauppinen
	Attention:  Pierre Beaudry
			2001-010826

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 October 31, 2001 regarding the calculation of the benefit taxable to a beneficiary of an RRSP on the final distribution of the assets held by the RRSP after the death of the last annuitant of the RRSP.

Our Comments

We assume the following:

1. The fair market value of the assets held by the RRSP at the time of death of the last annuitant is different from their fair market value at the time of the final distribution of the assets of the RRSP to its beneficiary;

2. The RRSP has earned income after the death of the last annuitant up to the time of the final distribution of assets;

3. The RRSP distributes all of its assets to its beneficiary before its taxable income is subject to tax pursuant to paragraph 146(4)(c) (i.e., before the beginning of the year following the year after the death of the last annuitant of the RRSP);

4. The income earned in 2 above was invested in capital assets and the values of those assets has changed since the date that they were purchased by the RRSP; and,

5. Paragraphs (b), (c), (c.1), (d), (e) and (f) of the definition of "benefit" in paragraph 146(1) of the Act (the "definition") are not applicable.

The definition provides that to determine the amount of the benefit taxable to the beneficiary of the RRSP we start with the fair market value of all assets transferred to the beneficiary of the RRSP when the RRSP is wound up. From this dollar value is subtracted, among other things that we have assumed are not applicable in this scenario (see 5. above), the amount that can reasonably be regarded as part of the amount included in the annuitant's income on his or her final T1 (i.e., the fair market value of the assets held in the RRSP at the time of the annuitant's death or paragraph (a) of the definition). Therefore, the definition requires a "tracking" of the assets held at the time of the death of the last annuitant of the RRSP.

Generally, the amount subtracted under paragraph (a) of the definition 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 death of the last annuitant have gone down in value and (ii) will apply if the assets have gone up in value.

Your Specific Example

The final annuitant of an RRSP dies on February 5, 2000 at a time when the fair market value of the assets held by the RRSP was $10,000. The RRSP earns income of $1,000 between February 5, 2000 and April 15, 2001 at which time the assets of the RRSP are distributed to the beneficiary of the RRSP. The assets distributed to the beneficiary of the RRSP have a fair market value of $9,000 which is fully attributable to a decline of $2000 in the fair market value of the assets held by the RRSP at the time of the death of the last annuitant (i.e., the fair market value of the assets held by the RRSP at the time of the death of the last annuitant has declined from $10,000 to $8,000 ).

In your view, of the $9,000 distributed to the beneficiary, the benefit taxable to the beneficiary of the RRSP is $1,000, being the income earned in the RRSP after the death of the last annuitant, and the other $8,000 received is the current value of the deemed benefit reported by the deceased annuitant on the final T1 (i.e., the amount of the deduction under paragraph (a) of the definition).

We agree that $1,000 is the amount of the benefit taxable to the beneficiary however, this is calculated as the fair market value of the assets received from the RRSP ($9,000) less the fair market value of the assets, at the time of the distribution, that were held by the RRSP at the time of death of the last annuitant ($8,000). Rather than viewing the income earned by the RRSP as a separate "element", the benefit should be considered as the mathematical result of the application of the "tracking" of the fair market value of pools of assets as discussed generally above. This will give the proper result because the value of the assets purchased by the RRSP with the $1,000 earned by the RRSP after the death of the final annuitant, but before the RRSP became subject to tax on its income, will be part of the total value of the assets actually transferred to the beneficiary and will be taxable to that beneficiary.

If the pool of assets (or assets substituted therefore) held at the time of the death of the last annuitant of the RRSP have gone up in value, the amount of the appreciation will also be taxable to the beneficiary of the RRSP at the time of the distribution from the RRSP.

Other Examples:

1. FMV of assets in RRSP
at the time of annuitant's death $10 $10 $10 $10

2. FMV of assets held at the
time of the annuitant's death
at the time of distribution
to the beneficiary 8 8 13 13

3. Income earned by the RRSP
after the time of the annuitants
death to the time of distribution
to the beneficiary (not taxable to
the RRSP) 5 5 5 5

4. FMV of assets purchased with income
earned by the RRSP in 3. at the time of
distribution to the beneficiary 6.50 3 6.50 3

Taxable to beneficiary:

((8 + 6.5) - 8) 6.50

((8 + 3) - 8) 3

((13 + 6.5) - 10) 9.5

((13 + 3) -10) 6

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