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: Whether the requirement in paragraph 146(2)(c.4) of the Income Tax Act (the "Act") prohibiting RRSPs from offering certain advantages to annuitants would be met in a number of different scenarios involving bonus interest rates on GICs.
Position: General comments.
Reasons: Question of fact.
XXXXXXXXXX 2004-005467
J. Gibbons, CGA
March 22, 2004
Dear XXXXXXXXXX:
Re: Prohibited Advantages under a Registered Retirement Savings Plan ("RRSP')
This is in reply to your letter dated January 2, 2004, in which you requested our views whether the requirement in paragraph 146(2)(c.4) of the Income Tax Act (the "Act") for the registration of an RRSP would be met in a number of different scenarios. Paragraph 146(2)(c.4) provides that no advantage (hereinafter referred to as a "prohibited advantage") that is conditional in any way on the existence of the retirement savings plan may be extended to an annuitant or to a person with whom the annuitant was not dealing at arm's length other than a benefit described in subparagraphs 146(2)(c.4)(i) to (iv).
Hypothetical Facts
In the following three scenarios, you want us to assume that the financial institution offers a higher interest rate on guaranteed investment certificates (GICs) to a client when the total amount invested with the financial institution exceeds $50,000, and, in determining whether this limit has been reached, the financial institution takes into account all of the GICs that the client has invested with it. You also want us to assume that the higher interest rate is only credited on amounts in excess of $50,000. That is, if the total amount of GICs is $55,000, the higher interest rate only applies to $5,000.
Scenario 1
A client has $45,000 of GICs outside of an RRSP and purchases a GIC of $10,000 for an RRSP account.
(i) Does the higher interest rate on part of the GIC in the RRSP constitute a prohibited advantage within the meaning of paragraph 146(2)(c.4)?
(ii) If the contribution is to an existing RRSP, is the issuer subject to a penalty under subsection 146(13.1) of the Act?
(iii) If the contribution was the first one to a new retirement savings plan, would the Canada Revenue Agency (CRA) refuse to register the plan?
Scenario 2
A client has $45,000 of GICs in an RRSP and purchases an additional GIC of $10,000 to be held outside of the RRSP.
(i) Does the higher interest rate on part of the $10,000 (non-RRSP) GIC constitute a prohibited advantage?
(ii) Is the issuer subject to a penalty under subsection 146(13.1)?
Scenario 3
A client has $45,000 of GICs in an RRSP account and purchases an additional GIC of $10,000 for the RRSP account.
(i) Does the higher interest rate on part of the GIC in the RRSP constitute a prohibited advantage?
(ii) Is the issuer have subject to a penalty under subsection 146(13.1)?
(iii) If the contribution was the first one to a new registered savings plan, would the CRA refuse to register the plan?
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and the subject matter of a request for an advanced income tax ruling submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.
By virtue of the exception in subparagraph 146(2)(c.4)(ii) of the Act, there is no prohibition against extending an advantage that consists of "the payment or allocation of any amount to the plan by the issuer." In this regard, paragraph 9 of IT-451R2, Deregistration of Registered Retirement Savings Plans, indicates that a prohibited advantage does not include inducements offered within the plan such as a bonus rate of interest on an RRSP deposit. Accordingly, in scenarios 1 and 3, the higher interest rate would not constitute a prohibited advantage within the meaning of paragraph 146(2)(c.4) since it only applies to GICs within an RRSP.
Where a non-RRSP investment attracts a bonus rate of interest that can be linked to the existence of an RRSP, it is our view that none of the enumerated exceptions in paragraph 146(2)(c.4) would apply. In this regard, even if a promotion permits individuals to qualify for a bonus interest rate without having an RRSP, if an RRSP is used in any way to determine eligibility for a higher interest rate, it is our view that a prohibited advantage exists. Thus, since the higher interest rate on part of the non-RRSP GIC in scenario 2 is dependent on the GICs of $45,000 in the RRSP, it is our view that a prohibited advantage has been extended. Accordingly, the issuer would be subject to a penalty under subsection 146(13.1) of the Act based on the value of the prohibited advantage.
You have also asked whether our position in each of the three scenarios above would differ if the financial institution credited the higher interest rate on all GICs once the $50,000 threshold is met. For example, if the total of all GICs is $55,000, the higher interest rate would be credited on each GIC making up the $55,000.
In our view, the exception in subparagraph 146(2)(c.4)(ii) would no longer apply in scenario 1 if all GICs are entitled to higher interest. This is because the annuitant would now be entitled to a higher interest rate in respect of non-RRSP GICs, and this bonus interest rate is linked to the $10,000 GIC within the RRSP. Accordingly, the higher interest rate on the non-RRSP GIC would be considered a prohibited advantage, and the issuer would be liable to a penalty under subsection 146(13.1) based on the value of that advantage. If the $10,000 GIC is invested in a new plan, the CRA would likely refuse to register the plan. Also, in both scenarios 1 and 2, the value of the prohibited advantage would now consist of the higher interest rate on the total amount invested in GICs outside of RRSPs.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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