10 March 1992 Income Tax Severed Letter 9204195 - Refund of Premiums — Mentally Infirm Child

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: REFUND OF PREMIUMS - MENTALLY INFIRM CHILD Section(s): 60(1), 146(1)(h)]

XXX 5-920419 D. S. Delorey (613) 957-8953

Attention: XXX

March 10, 1992

Dear Sirs:

Re: Refund of Premiums
Mentally infirm child

This is in reply to your letter of February 7, 1992 concerning amounts received out of a registered retirement savings plan (“RRSP”) as a refund of premiums.

Your concern relates to a situation involving a 26-year-old mentally infirm child who has income in excess of $5,000. You refer to the provisions of paragraphs 60(1) and 146(1)(h) of the Income Tax Act (the “Act”) and the fact that those provisions do not appear to allow the child, because of the amount of income he earns, to “rollover” to his RRSP an amount received out of the deceased's RRSP. If such is the case you are of the view that this is not intended. In this regard, you refer to the Department of Finance's Technical Notes concerning the 1990 amendment to paragraph 146(1)(h) of the Act, applicable to the 1989 and subsequent taxation years.

Our Comments

Where an amount is received out of an RRSP by a child as a refund of premiums, a deduction is available under subsection 146(8.9) of the Act to offset the inclusion of that amount in the deceased annuitant's income under subsection 146(8.8) of the Act. The amount received by the child is included in his income and a deduction is available to him under paragraph 60(1) of the Act to the extent that the amount is used to acquire a term annuity described in clause 60(1)(ii)(B) of the Act or, where the child is physically or mentally infirm, contributed to the child's RRSP. In this manner, the RRSP receipts are allowed to be “rolled over”. However, this rollover is available only if the amount received out of the RRSP qualifies as a “refund of premiums” as defined in paragraph 146(1)(h) of the Act.

An amount paid to a child out of a deceased annuitant's RRSP will qualify as a refund of premiums if, at the time he died, the annuitant had no spouse and his child was financially dependent on him for support. With respect to this “financially dependent” requirement, subparagraphs 146(1)(h)(iii) and (iv) of the Act provide that it shall be assumed, unless the contrary is established, that the child was not financially dependent on the annuitant at that time if

• (a) any person other than the annuitant was permitted a deduction under paragraph 118(1)(d) in respect of the child in computing his tax payable under Part 1 for the taxation year immediately preceding the taxation year in which the annuitant died, or
• (b) the income of the dependant exceeded $5,000 for the year immediately preceding the taxation year in which the annuitant died.

Your concern relates to the provision in (b) above. The 1990 amendment referred to above was not intended to delete this provision. Rather, that amendment pertains to a limit that was previously included in paragraph 146(1)(h) of the Act; i.e., except where the child was dependent by reason of physical or mental infirmity, the amount that qualified as a refund of premiums could not exceed $5,000 for each year that the child was under 26 at the time of the annuitant's death. The purpose and effect of the 1990 amendment was to delete this limit for post-1988 taxation years.

Consequently, the rollover discussed above is available only where it can be substantiated that the child was financially dependent on the deceased annuitant at the time of the annuitant's death; i.e., where it can be established that the assumption referred to above is invalid. Documentation in support of a claim that the assumption is invalid should be included with the child's tax return for the year in which a deduction under paragraph 60(1) is sought by the child.

Our comments are an expression of opinion only and are not binding on the Department as explained in paragraph 21 of Information Circular 70-6R2. We trust, however, that they are of assistance.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate