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.
Principal Issues:
Tax implications when an RCA is wound up and an exempt policy is transferred from the RCA
Position:
Tax implications to the rca trust and the beneficiary
Reasons:
Applicable provisions of the Income Tax Act
February 21, 1996
WINNIPEG TAXATION CENTRE HEADQUARTERS
P. Spice
Attention: Gisèle Talgoy M. Trotier
Employer Services (613)-957-8953
953246
Transfer of Exempt Policy from Retirement Compensation Arrangement (RCA)
This is in reply to your request based on information provided to us in your faxes dated December 11 and December 12, 1995 and also during telephone conversations between Mrs. Gisèle Talgoy of your Taxation Centre and Michèle Trotier of our Directorate concerning the potential income tax implications when an RCA is wound up.
Our understanding of the facts is as follows:
1.An employer has made contributions into a trust which is considered to be an RCA as defined in subsection 248(1) of the Income Tax Act (the "Act").
2.Refundable tax has been paid pursuant to Part XI.3 of the Act.
3.The net contributions were then used by the RCA to acquire a life insurance policy. You have advised that this policy is an "exempt policy" described in section 306 of the Income Tax Regulations.
4.You have been advised that the cash surrender value and the fair market value of the life insurance policy at this time are equal but are less than the adjusted cost basis of the policy.
5.The RCA is to be wound up and all the property within the RCA is to be distributed. The life insurance policy, the only property of the RCA, is to be transferred to an employee (Mr. X).
Upon a distribution of property from an RCA trust to a beneficiary which distribution is used to satisfy all or part of the beneficiary's interest under the RCA, section 107.2 of the Act will apply. This provision is for purposes of Part I and Part XI.3 of the Act. Consequently, pursuant to section 107.2 of the Act the exempt policy which is the subject of the distribution will be deemed to have been disposed of by the RCA trust at fair market value and the beneficiary, Mr. X, will be deemed to have acquired the policy at an amount equal to the fair market value.
Where the fair market value of the policy does not exceed the adjusted cost basis of the policy there will be no income or loss included in or deducted from the income of the RCA trust. Where the fair market value of the policy exceeds the adjusted cost basis of the policy, the excess would be included in the income of the RCA trust pursuant to subsection 148(1) and paragraph 56(1)(j) of the Act. However, this excess would not be subject to Part I tax to the RCA trust because of the exemption provided for in paragraph 149(1)(q.1) of the Act. Nevertheless, since this excess would be considered to be income from property it would be included in the calculation of the "refundable tax" as provided for in subsection 207.5(1) of the Act.
The calculation of the refundable tax is a cumulative calculation which is done at the end of a taxation year and as noted is set out in subsection 207.5(1) of the Act. The amount of tax payable by the custodian, the employer in your example, of a retirement compensation arrangement for a particular taxation year is equal to the amount by which the refundable tax at the end of the year exceeds the refundable tax at the end of the immediately preceding taxation year, if any, pursuant to subsection 207.7(1) of the Act. The amount of tax refund to the custodian of a retirement compensation arrangement is determined pursuant to subsection 207.7(2) of the Act and is equal to the amount, if any, by which the refundable tax at the end of the immediately preceding taxation year exceeds the refundable tax at the end of the year. Accordingly, with respect to a taxation year of an RCA trust the custodian thereof may be required to pay tax or be entitled to a refund under Part XI.3 of the Act but not both.
Section 107.2 of the Act also provides that the RCA trust is deemed to have paid to the beneficiary as a distribution an amount equal to the fair market value of the policy which is transferred to the beneficiary. This amount is included in the income of the beneficiary, Mr. X, pursuant to paragraph 56(1)(x) of the Act. Note, however, that if the transfer of the policy meets the conditions of paragraph 254(a) of the Act, Mr. X will be taxable only as amounts are received under the policy. We are unable to confirm which tax result applies in this situation since we do not have sufficient information concerning the terms of the RCA trust, the nature of the policy or the circumstances surrounding the wind-up of the RCA trust and the distribution of the policy to Mr. X.
Where the exempt policy is the only property of the RCA trust and there is an amount of refundable tax which has not been triggered by the distribution of the policy, the custodian may file an election under subsection 207.5(2) of the Act and claim a refund of the remaining refundable tax under subsection 207.7(2) of the Act.
Any amount of the refundable tax paid to the beneficiary, Mr. X, is also taxable to the beneficiary, Mr. X, pursuant to paragraph 56(1)(x) of the Act.
Information concerning distributions of property from an RCA trust is contained at pages 9 and 12 of the Retirement Compensation Arrangement Guide (Rev. 1989) and commentary about the subsection 207.5(2) election can be found at page 4 of the Guide.
We trust that the above information will be of assistance to you.
F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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