1 April 2003 External T.I. 2003-0004635 - RRSP LOSSES AFTER DEATH OF ANNUITANT

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:

Can the beneficiaries of a RRIF utilize a loss realized by a RRIF on distribution of the assets held by the RRIF? The loss originated from a decline in the value of the value of the assets during the period from the date of the RRIF annuitant's death and the date of the distribution of the RRIF assets to the beneficiaries.

Position: No.

Reasons:

There is no provision in the Act that allows the loss to be flowed out of the RRIF to the RRIF beneficiaries.

XXXXXXXXXX 			2003-000463
G. Kauppinen
April 1, 2003

Dear XXXXXXXXXX:

Re: Decline in Value of Assets held by a Registered
Retirement Income Fund ("RRIF") After the Death of the Annuitant

This is in reply to your facsimile transmission of February 21, 2003 requesting our opinion regarding the use of a capital loss realized by a RRIF when its assets are transferred from the RRIF to the beneficiary under the RRIF. The capital loss arose due to a decline in the value of the assets held by the RRIF that occurred after the death of the annuitant.

Our Comments

The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer and completed transactions. Since your situation involves a specific taxpayer and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Pursuant to 146.3(6) of the Act, where the last annuitant under a RRIF dies, the fair market value of all of the property held by the RRIF at the time of death will be included in computing the income of the deceased on his or her final tax return.

A RRIF trust continues to exist after the death of the annuitant under the RRIF until all assets of the RRIF have been transferred to the beneficiaries of the RRIF. This is generally true in trust law (common law)(i.e. a trust, once established, continues to exist as long as it holds assets). We note that subsection 146.3(3.1) of the Income Tax Act ( the "Act") provides that a RRIF trust will become taxable for each year after the year RRIF continues to exist if it still hold assets because it cannot legally transfer those assets to its beneficiaries (or the estate of the annuitant) until probate has been completed. The RRIF will cease to exist only when all of its assets have been distributed as stated above.

When the assets of the RRIF are distributed to the beneficiaries of the RRIF, all amounts received by the beneficiary are taxable as a benefit out of a RRIF (subject to certain reductions as discussed below). The character of the income received by the RRIF (e.g. dividends, interest, capital gains etc.) is therefore lost when the income is flowed out to the beneficiaries of the RRIF. The amount of the benefit that is included in the beneficiary's income for tax purposes is reduced by, among other things, the value of the assets distributed that can reasonably be considered to be part of the amount that was included in computing the income of the annuitant on his or her final T1 (paragraph 146.3(5)(a)) of the Act). This deduction is limited to the fair market value of the assets distributed if an asset (or asset substituted therefore) has gone down in value since the death of the last annuitant. In this case, the deduction is restricted to the reduced value. If the asset has gone up in value since the death of the annuitant, the deduction is limited the amount that was taxed on the final T1 of the deceased annuitant.

If the RRIF becomes taxable, the benefit taxable to the beneficiaries on assets received by them is further reduced by the portion of the benefit that can reasonably be regarded as an amount received in respect of the income of the RRIF for a taxation year in which the RRIF was not exempt from tax (paragraph 146.3(5)(b) of the Act). In other words, the beneficiary gets a reduction in respect of amounts received from the RRIF that were taxed in the RRIF.

The adjusted cost base of the assets to the beneficiary of the RRIF that receives those assets will be the fair market value of the asset at the time of the distribution from the RRIF.

We note that there is no provision in the Act that allows a capital loss in the RRIF (realized or unrealized) to be flowed to the beneficiary under the RRIF. This issue has been under review by the Canada Customs and Revenue Agency ("CCRA") and the Department of Finance. The current status of the review is described on the CCRA internet website at http://www.ccra-adrc.gc.ca/tax/registered/2002rrspinfo/e.html under item 5.

We trust our comments will be of assistance to you.

Yours truly,

Mickey Sarazin C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate