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.
Dear Sir:
Re Measurement of Fixed Term Annuities Purchased with RRSP Funds
We are writing in reply to your letters of July 7 and October 1, 1991 which were referred to us by the Registrations Directorate, and to your letter of November 4, 1991. You asked three questions concerning the conditions imposed by the Income Tax Act (the "Act") on the purchase of annuities on the maturity of a Registered Retirement Saving Plan ("RRSP") The questions and our replies follow.
1. What is the latest possible date that may be chosen for the commencement of an RRSP annuity?
A retirement savings plan must provide that a retirement income commence at maturity (definition of "retirement saving plan" in paragraph 146(1)(i.j) of the Act). The definition of "retirement income" in paragraph 146(1)(i.1) of the Act states that it means an annuity commencing at maturity. An RRSP must mature no later than the end of the year in which the annuitant attains 71 years of age (paragraph 146(2)(b.4) of the Act). Therefore, the annuity must "commence" no later than December 31 of the year in which the annuitant attains 71 years of age.
In our opinion an annuity commences when the contract is executed and, unless the annuity contract provides for payment of periodic amounts in advance, the first payment thereunder can be made up to a year later. (Equal annual or more frequent periodic payments are required by paragraph 146(2)(b.1) of the Act.) Therefore, the latest possible date a payment can be made is December 30th of the year following the year in which the annuitant turns 71.
2. How is the term of the annuity calculated under paragraph 146(1)(i.l)?
If the annuity is to constitute "retirement income" within the meaning of the aforementioned provision, it must be for a term of years no greater than 90 minus the age of the annuitant or of his or her younger spouse at the maturity of the plan. Maturity is specified in the RRSP and would be the date the plan funds are used to purchase the annuity. The actual dates on which periodic payments are made are therefore irrelevant for the purpose of calculating the term of the annuity.
In our view the annuity must be for a term of years that, at the time of purchase of the annuity, equals 90 minus either the annuitant's age or the age of his or her younger spouse. This is consistent with our interpretation of the phrase "commencing at maturity" as discussed under 1 above.
3. Is it possible to purchase a registered fixed term annuity for a term of years less than the number referred to in paragraph 146(1)(i.1) of the Act?
Under the formula in paragraph 146(1)(i.1) the shortest term for an annuity satisfying the retirement income definition would be 19 years.
An annuitant, however, may transfer the property in the RRSP to a registered retirement income fund (RRIF) prior to the maturity of the RRSP pursuant to subsection 146(16) of the Act. To satisfy the conditions for registration, a retirement income fund must not permit payments except in accordance with the RRIF provisions (paragraph 146.3(2)(a) of the Act). The only provision which imposes a minimum term for a RRIF is found in the definition of "retirement income fund" in paragraph 146.3(1)(f). The carrier of a RRIF must pay "one or more amounts" commencing in the year after the RRIF is set up and any one payment may not exceed the value of the property held in the RRIF. Therefore, a RRIF can be entered into on December 31 of year 1 and the full amount paid out in year 2.
Lastly, an amount out of a RRIF in excess of the minimum amount may be used to purchase an eligible annuity pursuant to paragraph 60(L) of the Act. Terms of eligible annuities are generally for life or for a term equal to that obtained under the formula in paragraph 146(1)(i.1), with the exception that a term can be equal, at the time of the purchase of the annuity, to 90 minus the age of a spouse older than the annuitant.
The foregoing comments are an expression of opinion only and are not binding on the Department. We hope, however, that they are of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate
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