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.
Taxation of property held in a RRIF at time of death.
Imputed income from recreational property.
Provided general comments on provisions applicable.
There is no basis for imputing income from foreign residential property held directly by an individual.
General explanation of law was requested.
It appears the writer may be thinking of FAPI rules which might apply to residential properties held through an intermediary trust or corporation (condominium) or to foreign property held by a closely held corporation and made available for personal use. Nothing specific to the question was found in our files. However personal property held solely for recreational or residential use would not produce any imputed income other than potential capital gains.
W. C. Harding
August 12, 1998
Re: Taxation of Registered Retirement Income Funds (“RRIFs”)
This is in reply to your letters of June 7, 1998, in which you requested clarification of the taxation of property held in a RRIF under various circumstances.
Since your enquiry deals with your personal estate planning, we must first note that we cannot provide written confirmation of the tax implications inherent in particular transactions unless the transactions are outlined in a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R3. Accordingly, at this time, we can only provide general comments that may or may not apply to your specific situation.
Also we note that in addition to the Interpretation Bulletins that you have already looked at, you may find the enclosed publications RRSPs and Other Registered Plans for Retirement and Information Circular 78-18R5 entitled Registered Retirement Income Funds of assistance.
A RRIF may be established with one individual named as the annuitant in which case payments required under the terms of the plan are paid to the annuitant during his or her lifetime and thereafter, to the individual’s estate or a beneficiary named in the RRIF. Alternatively, an individual may be named as the annuitant of a RRIF and the annuitant’s spouse named as the annuitant after the individual’s death. In this case payments required under the terms of the plan must be made to the annuitants over their lifetimes with the balance of the RRIF property passing on the death of the last annuitant to the estate of the last annuitant or to a beneficiary named in the RRIF. If an individual’s spouse is not named as the successor annuitant in the RRIF it may be possible to have a deceased annuitant’s spouse continue as the annuitant of the plan if the consent of the legal representative of the deceased annuitant is obtained.
Where an election is made to have an individual’s spouse named as the annuitant of a RRIF on the death of the first annuitant, the successor annuitant acquires all rights of ownership of the RRIF such that the first annuitant of the RRIF cannot generally require the property of the RRIF be directed to the estate of the first annuitant on the death of the second annuitant.
A RRIF is required to make minimum annual payments to the annuitants of the RRIF during their lives. These minimum payments must be calculated using a formula set out in the Act or rates prescribed in section 7308 of the Income Tax Regulations that are applicable in the circumstances. RRIFs that were established before March 1986 that have not been revised since that date are required to calculate minimum payments under a formula that requires all amounts to be paid out of the RRIF by the time the last annuitant is 91 years of age. However, RRIFs that were created after February 1986 and most plans that have been modified since then, are permitted to continue throughout the lives of the annuitants.
Minimum payments are discussed in detail in paragraphs 5 through 12 of the enclosed circular. However, you should note that amendments to these rules were enacted in June 1998 for plans that hold annuities as investments. These changes are fairly complex and beyond the scope of this letter. Accordingly, if you are considering the acquisition of annuities in your RRIF, you may wish to discuss the situation with the carrier of your RRIF or a financial advisor.
Problems can arise in a RRIF if it holds properties with fixed terms such as mortgages and annuities. In particular , a RRIF could hold a mortgage or some other form of investment that does not generate a sufficient cash flow to pay the minimum amount required each year. If this occurs, the investment might have to be sold in order to obtain the necessary funds to pay the minimum amount or the RRIF could be terminated. While problems may also occur where the RRIF holds an annuity, the calculation of the minimum amount may now take into consideration the terms of the annuities in some situations. You may wish to discuss this with your financial advisors.
Generally the fair market value of all property held in a RRIF must be included in the income of the last annuitant of a RRIF at the time of death. However in certain cases some amounts may be excluded from the deceased annuitant’s income when they are transferred to and included in the income of the spouse of the last annuitant, minor children of the annuitant or children that are physically or mentally dependent on the annuitant for support at the time of death. The provisions also allow the beneficiary to transfer the amounts to their own RRSPs, RRIFs or tax deferred annuities in most cases and receive an offsetting deduction on the transfer. The provisions are discussed in detail in the documents you have acquired and in the enclosed guides.
Property must be distributed out of a RRIF to the estate of the last annuitant or to the named beneficiaries of the plan at the time of death of the annuitant. However, the property may generally be transferred in kind. Accordingly, a mortgage could be transferred to a beneficiary who would then report the income earned each year thereafter. The calculation of the income would also take into account the amount brought into income of the deceased. Similar requirements would apply to any annuity held by a RRIF that have guaranteed terms and do not terminate on the death of the annuitant. An annuity may also have terms that require its commutation on the death of the annuitant.
You also asked about Department practices with respect to imputing income in respect of a foreign residential property. Without knowing the full details of your investment we are not sure what provisions of the Act you may be considering. However, we can advise that there is no provision in the Act that imputes income in respect of real property owned by an individual where the property is used exclusively as a personal residential property.
We trust this information will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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