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: Will a "settlement annuity" that must be provided to a beneficiary on death of the RRSP annuitant satisfy the registration provisions under subsection 146(2) of the Act?
Position: Question of fact. Based on the description of a "settlement annuity" provided, in our view, there may be a problem with satisfying the requirements of paragraph 146(2)(c.2) of the Act.
Reasons: Wording of paragraph 146(2)(c.2).
XXXXXXXXXX 2005-012016
G. Allen
July 20, 2005
Dear XXXXXXXXXX:
Re: Settlement Annuity - RRSP
This letter is a reply to your letter dated March 8, 2005, wherein you requested our comments concerning the beneficiary designation under a registered retirement savings plan (RRSP) issued by a life insurance company and the taxation of amounts after the death of the RRSP annuitant. Specifically, you enquire about these issues as they relate to an annuity product that you refer to as a settlement annuity arising from an RRSP annuity contract. We will respond to your questions in the same order they were presented in your letter.
In your letter, you provide the following description of a settlement annuity arising from an RRSP annuity contract.
XXXXXXXXXX
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the CRA. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.htm l.
Question 1.
A retirement savings plan (RSP) issued by an insurance company is a contract between an individual, the annuitant, and the insurance company under which a retirement income is to be provided to the annuitant. The retirement income to be provided to the annuitant must be in accordance with the definition of "retirement income" in subsection 146(1) of the Income Tax Act (the "Act"). In general, the retirement income must be:
a) a single life annuity or a joint and last survivor annuity, payable to the annuitant, and with or without a guaranteed term not exceeding 90 minus either the age of the annuitant at maturity of the plan or if the annuitant's spouse or common-law partner is younger, their age, or
b) a fixed term annuity payable to the annuitant for a term equal to 90 minus either the age of the annuitant at maturity of the plan or if the annuitant's spouse or common-law partner is younger, their age,
or any combination of a) and b).
Annuitant is defined in subsection 146(1) of the Act, in general, as the individual who enters into the RSP contract with the insurance company and, after the individual's death, the spouse or common-law partner of the individual.
In order for an RSP to be registered under subsection 146(2) of the Act, the RSP must contain, inter alia, the provisions of paragraph 146(2)(c.2) of the Act. Specifically, the RSP must require the commutation of the annuity where the annuity would become payable to someone other than an annuitant under the RSP.
To summarize, the annuity provided under an RRSP can only be paid to the annuitant under the RRSP and, after the annuitant's death, to the spouse or common-law partner of the deceased annuitant. Where the beneficiary under the RRSP is an individual other than the annuitant's spouse or common-law partner, the annuity provided under the RRSP must be commuted.
Based on the above description of the settlement annuity that must be purchased for the RSP beneficiary under an RSP annuity contract, it is not clear to us whether this type of annuity would satisfy the requirements of paragraph 146(2)(c.2) of the Act and therefore be accepted for registration under subsection 146(2) of the Act. As you are probably aware, the Registered Plans Directorate of the CRA is responsible for approving RSP specimen plans and the registration of individual RSPs that are identical to the approved RSP specimen plan. As a result, you may wish to consider obtaining the views of the Registered Plans Directorate concerning this type of RSP annuity contract.
Question 2
When the annuitant under an RRSP dies, subsection 146(8.8) of the Act deems the annuitant to have received, immediately before death, a benefit equal to the fair market value ("FMV") of the property held in the RRSP at that time. Subsection 146(8.9) of the Act provides for a discretionary deduction from the RRSP amount included in income pursuant to subsection 146(8.8) of the Act. The deduction is only applicable in respect of: (a) a refund of premiums in respect of the RRSP, (b) a tax-paid amount paid to an individual who received a refund of premiums in respect of the RRSP (other than a deemed refund of premiums), or (c) a tax-paid amount paid to the legal representative of the plan annuitant that could have been designated under subsection 146(8.1) of the Act if tax-paid amounts were not excluded in determining refunds of premiums.
A refund of premiums is defined in subsection 146(1) of the Act to be any amount paid out of or under an RRSP as a consequence of the death of the annuitant under the plan:
a) to the spouse or common-law partner of the annuitant, where the amount is paid prior to maturity of the plan, or
b) to a child or grandchild of the annuitant who was, at the time of the death, financially dependent on the annuitant for support.
Accordingly, where the RRSP annuitant dies and the designated beneficiary under the RRSP is not the deceased annuitant's spouse or common-law partner or a child or grandchild who was financially dependent on the deceased annuitant, and an election under subsection 146(8.1) is not possible, the FMV of the property in the RRSP would be included in the deceased annuitant's income pursuant to subsection 146(8.8) of the Act and a deduction under subsection 146(8.9) would not be available.
Question 3
Where the terms of the RRSP provide that on the death of the annuitant a settlement annuity will be purchased on the life of a beneficiary who is not the deceased annuitant's spouse or common-law partner or a child or grandchild who is financially dependent on the deceased annuitant, depending on the specific terms of the settlement annuity, the designated beneficiary will be required to include amounts in income pursuant to either paragraph 56(1)(d) or section 12.2 of the Act.
Question 4
With regard to the application of subsection 146(8.8) of the Act, please refer to our comments under Question 2.
Where the designated beneficiary under an RRSP is an individual who was the spouse or common-law partner of the deceased annuitant, prior to the annuitant's death, and an amount is paid out of an unmatured RRSP as a consequence of the annuitant's death to the spouse or common-law partner, the amount paid would be a refund of premiums. As a result, in our view, where the beneficiary designation under an RRSP requires that prior to maturity of the RRSP and on death of the annuitant, an amount will be paid to the spouse or common-law partner of the deceased annuitant for the purpose of purchasing a settlement annuity for the spouse or common-law partner, the amount paid would be considered a refund of premiums.
Question 5
In our view, provided the settlement annuity purchased, in the circumstances described in Question 4, is an annuity described in subparagraph 60(l)(ii) of the Act, the periodic annuity payments paid from the settlement annuity would be taxable under paragraph 56(1)(h) of the Act.
We trust the above comments will be of assistance.
Yours truly,
Roberta Albert, CA
Manager
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch
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