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 trustee properly determined the RRSP trust's Part I income on non-qualified investments under Subsection 146(10.1).
Reasons: Subsection 146(10.1) of the Act provides that an RRSP trust is taxable on any income earned on non-qualified investments.
July 12, 2013
We are writing in response to your email in which you requested a technical interpretation with respect to the application of subsection 146(10.1) of the Income Tax Act (the "Act") in the following situation.
A registered retirement savings plan (RRSP) acquired shares after March 23, 2011, which were listed on a designated stock exchange. These shares subsequently became delisted and a non-qualified investment for the RRSP. Upon becoming a non-qualified investment, the shares were worth $11, which is significantly less than the $43 originally paid for the investment. The shares recovered a portion of their value and were worth $29 upon ultimate disposition by the RRSP. Despite the fact that the shares have an overall loss of $14, the trustee reported an $18 gain and calculated taxes payable by the RRSP under subsection 146(10.1) of the Act. You have asked if the amount of tax calculated has been determined correctly.
Your correspondence describes a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not our practice to comment on the tax consequences applicable to a specific taxpayer in particular circumstances except in the form of an advance income tax ruling. We can however, offer the following general comments. While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Canada Revenue Agency.
RRSPs are required to limit their investments to qualified investments. Pursuant to paragraph (d) of the definition "qualified investment" in section 204 of the Act, which is incorporated by reference into the RRSP qualified investment definition in subsection 146(1) of the Act, a qualified investment for an RRSP includes securities (other than futures contracts or other derivative instruments in respect of which the holder's risk of loss may exceed the holder's cost) which are listed on a designated stock exchange. Securities that are listed on a foreign designated stock exchange that are subsequently delisted will generally become a non-qualified investment, unless they meet another qualification condition such as those that apply to certain Canadian businesses.
If an investment held by an RRSP becomes non-qualified, subsection 207.04(1) of the Act provides that the RRSP annuitant is subject to a tax equal to 50% of the fair market value of the investment at the time it becomes non-qualified. This tax is refundable under subsection 207.04(4) of the Act in cases of inadvertence provided that the investment is disposed of before the end of the following year (or such later time as is permitted by the Minister).
In addition, any income or capital gains earned by the RRSP on the non-qualified investment is taxable under Part I of the Act. For the purposes of calculating capital gains, proposed subsection 207.01(6) of the Act provides a deemed disposition rule for property that ceases to be a qualified investment. The RRSP is deemed to have disposed of the property and immediately re-acquired the same property, at the time of the status change, at a cost equal to the fair market value.
There is a possibility that overall, the disposition of the investment may result in a loss if the proceeds upon ultimate disposition of the investment are less than the original acquisition cost by the RRSP. This capital loss is not available to offset any capital gains realized, and taxed in the RRSP.
The annuitant may also receive a notice from the Minister of National Revenue, requesting the removal of specified non-qualified investment income from the trust. Specified non-qualified investment income includes income that is reasonably attributable, directly or indirectly, to an amount that is taxable under Part I of the Act for an RRSP and, for this purpose, income includes capital gains.
An annuitant subject to tax is required to file RC339, Individual Return for Certain Taxes for RRSPs or RRIFs for Tax Year 20XX. The return must be filed with the payment for any balance due, no later than June 30 of the following year. RC339 provides instructions on how to claim a refund, if applicable. Information on the specific tax filing requirements may be found at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ntvdnc/menu-eng.html.
Similar rules apply to non-qualified investments held by a registered retirement income fund trust and a tax-free savings account trust.
We trust that these comments will be of assistance.
Mary Pat Baldwin, CPA, CA
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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