10 September 1996 External T.I. 9626425 - CALCULATION OF RRIF MINIMUM AMOUNT

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:

"Minimum amount" calculation captures unrealized capital gains & subjects then to tax.

Position:

Confirmed this is correct.

Reasons:

Definition of "minimum amount" uses "fair market value" of properties as at January 1 as a factor.

									962642
XXXXXXXXXX							P. Spice

September 10, 1996

Dear XXXXXXXXXX:

Re: Calculation of "Minimum Amount"

This is in reply to your letter of June 14, 1996, which was forwarded to us by the Shawinigan Tax Centre. You ask for a clarification of the method of calculating the "minimum amount" as defined in subsection 146.3(1) of the Income Tax Act (the "Act") of a registered retirement income fund ("RRIF").

We cannot provide any comments that relate to a particular situation such as the actual calculation of the "minimum amount" in respect of an existing investment in your RRIF. We may, however, provide the following general comments concerning the calculation.

The term "minimum amount" is defined in the Act as the product obtained when the fair market value of the property held in connection with the RRIF at the beginning of the year is multiplied by the prescribed amount for, as the case may be, the annuitant or the spouse.

"Fair market value" is not defined in the Act and takes on its ordinary meaning. For example, Black's Law Dictionary (6th edition) defines fair market value as:

the amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.

With respect to a debt instrument which has a face amount or maturity value, the fair market value may be higher or lower than the maturity value because of the stated interest rate. The holder would be able to sell the instrument for a price higher than the face amount (i.e., at a premium) if the stated interest rate is higher that the current interest rates offered on comparable instruments. Conversely, if the stated interest rate is lower, the holder would sell at a discount.

The definition of "minimum amount" requires that the fair market value and not the face amount of a debt instrument be used. As a result, properties in a RRIF may be valued higher or lower than their face amount and this factor in the calculation may rise or fall from one year to the next.

As you point out, the capital base of your RRIF will be eroded more quickly by an increase in the "minimum amount" in years where the properties in your RRIF command a higher market price and you will pay higher income tax. This is the inevitable result, however, of the wording in the Act; any submissions concerning the unfairness of the legislation should be directed to the Department of Finance which is responsible for any amendments to the legislation. The mailing address is Tax Legislation Division, Department of Finance, Ottawa, Ontario, K1A 0G5.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch