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.
Purchase of charitable gift annuity with RRSP funds.
Discussed various possibilities.
Reasons FOR POSITION TAKEN:
June 2, 1995
Re: Annuities in Registered Retirement Savings Plan
This is in reply to your letter of November 22, 1994, to the Registered Plans Division which has been forwarded to us for reply. We apologize for the delay in our response. You ask what tax consequences would attend a proposed purchase of a charitable gift annuity through an individual's registered retirement savings plan (RRSP).
Your query relates to an actual proposed transaction and we are unable to provide the Department's position except in the context of an advance income tax ruling. Enclosed is Information Circular 70-6R2 which describes the method for requesting such a ruling. Although we cannot answer your specific questions, we hope the following general information is helpful.
The particular RRSP trust described in your letter was purchased with "locked-in" funds and we advise that there may be a prohibition on using funds in such an RRSP to make a gift. The rules respecting "locked-in" RRSP's are contained in the federal or provincial pension benefits standards legislation and you or the annuitant may wish to obtain the advice of the federal or provincial authorities who administer this legislation.
There are several methods in which an annuity contract can be used in conjunction with an RRSP. Note, however, that there is no tax advantage to the annuitant in structuring an RRSP or RRSP investment in this manner.
1. Annuity contract registered as an RRSP
A person licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an annuities business can register an annuity contract as an RRSP (referred to hereafter as an "insured" RRSP). The annuity contract must provide for commencement at maturity (i.e., no later than the end of the year in which the annuitant turns 71 years of age) of a "retirement income".
Where an individual has an RRSP trust and wishes to transfer it to an "insured" RRSP, this can be accomplished in accordance with paragraph 146(16)(a) of the Income Tax Act (the "Act"). Note that paragraph 146.3(2)(e) of the Act, to which you refer in your letter, governs a transfer from a registered retirement income fund (RRIF) to another RRIF. A tax-deferred transfer under paragraph 146(16)(a), however, is only possible where all the property in the transferor RRSP is used to acquire the insurance contract under the transferee RRSP.
Should only part of the funds in the RRSP trust be used to purchase the annuity, for example, where the annuity's value is less than the amount transferred into the RRSP, that part which is not used will be considered a benefit out of or under the RRSP and will be taxable to the annuitant under subsection 146(8) pursuant to subsection 56(2) of the Act. The transferee RRSP issuer would issue a T4RSP for the amount of this benefit. The annuitant could then claim a tax credit for that amount as a gift to a registered charity pursuant to subsection 118.1(3) of the Act and in accordance with Interpretation Bulletin IT-111R.
If, instead, the annuitant wished to gift all the funds in the RRSP to a registered charity after its transfer to the insured RRSP, the total amount of the property would be taxable to the annuitant pursuant to subsections 56(2) and 146(8) of the Act and the tax credit for the charitable gift would be as calculated under subsection 118.1(3) of the Act. As noted above, where the RRSP is locked-in it is unlikely that such a gift would be possible.
Where all or a portion of the transferred funds are used to acquire the insurance contract, the "insured" RRSP could provide that on the death of the annuitant, either before or after the maturity of the plan, the proceeds will be paid to a registered charity.
After the maturity of an "insured" RRSP, the issuer is responsible to issue the T4RSP for the periodic annuity payments made to the annuitant in each calendar year. The total amounts are included in the annuitant's income pursuant to subsection 146(8) and paragraph 56(1)(h) of the Act.
Upon the death of the annuitant of an "insured" RRSP, whether the RRSP has matured or not, the fair market value of the RRSP property at the date of death is brought into the annuitant's income pursuant to subsection 146(8.8) and paragraph 56(1)(h) of the Act. The issuer is required to issue a T4RSP for this amount for the year of death.
Amounts earned in the RRSP after death to December 31 of the year that follows the year of the annuitant's death are income to the beneficiary (in this case, a registered charity) and should be reported on a T4RSP; if the payout date occurs after December 31 of the year following the year of death, income earned after that date should be reported on a T5 slip in the charity's name. To confirm whether it is necessary to issue a T4RSP or T5 slip where the beneficiary is a registered charity and therefore exempt from income tax, please contact the Source Deductions section of your local tax services office. For further information concerning the T4RSP, please refer to the current T4RSP and T4RIF Guide which is available at your tax services office.
2. Annuity contract as qualified investment for RRSP trust
When RRSP's are administered by a trust company which is licensed or authorized in Canada to carry on the business of offering its services as trustee to the public, the property of the RRSP trust may be invested in various instruments, including annuity contracts as described in the definition of "retirement income" in subsection 146(1) of the Act. RRSP trusts may also invest in life insurance contracts (defined in subsections 248(1) and 138(12) of the Act to include annuities). The rules for these investments are very complex and are discussed at length in Interpretation Bulletin IT-408R, a copy of which is enclosed.
The "qualified investment" rules are irrelevant to an "insured" RRSP and a person licensed or authorized to carry on an annuities business is restricted to entering into an insurance contract which is itself an RRSP. Such a person cannot administer an RRSP trust which can invest in qualified investments unless that person is also authorized to offer its services as a trustee.
3. Transfers to Annuities from RRSP's
Paragraph 60(l) of the Act provides for the tax-deferred transfer of amounts out of RRSP's to acquire annuities in certain limited circumstances. Unlike the situation described in 1 above, these annuities would provide for immediate commencement of the payment of periodic income.
We wrote to XXXXXXXXXX in Ottawa on August 31, 1993 (our letter 932169), concerning RRSP trusts, the qualified investment rules and the tax-deferred transfer of RRSP property to acquire an "eligible annuity" pursuant to paragraph 60(l) of the Act. Since it appears that your concerns relate specifically to the situation discussed in 1 above we have not elaborated on the latter matters. We suggest that if you wish further information concerning topics 2 and 3, you obtain a copy of the aforementioned letter from your Ottawa office.
We trust the foregoing information is helpful although, as noted above, it is not binding on the Department.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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