25 November 1998 Ministerial Letter 9824298 - COST AMOUNT, RRSP TO RRIF TRANSFERS

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: What is the cost amount of property transferred from an RRSP to a RRIF?

Position: FMV at time of transfer.

Reasons: The provisions of subsection 206(4) are clear.

XXXXXXXXXX

Dear XXXXXXXXXX:

The Honourable Herb Dhaliwal, Minister of National Revenue, has asked me to reply to your letter of August 24, 1998, concerning Revenue Canada’s position that property from an individual’s registered retirement savings plan (RRSP) must be transferred to his registered retirement income fund (RRIF) at the property’s fair market value.

Under the Income Tax Act, a trust governed by a RRIF pays a 1 per cent penalty tax on the amount by which the cost amount of its foreign property exceeds 20 per cent of the cost amount of all of its property held by the RRIF at the end of each month. Where foreign property has outperformed the domestic property held in an individual’s RRSP and all of the property held by the RRSP is transferred to the individual’s RRIF at its fair market value, the RRIF could be subjected to this tax. For example, the penalty tax would apply if, at the transfer date, the fair market value of the foreign property exceeded 20 per cent of the fair market value of all of the property held at that time (notwithstanding that, as measured on a cost amount basis, the foreign property may not exceed 20 per cent). It is your belief that the provisions of the Income Tax Act are not intended to subject a RRIF to this penalty tax in such situations.

Subsection 206(4) of the Act provides that where an RRSP, RRIF or other taxpayer acquires a property from a person with whom the taxpayer was not dealing at arm’s length, for no consideration or for consideration that is less than the fair market value of the property at the time, the taxpayer will be deemed to have acquired the property at its fair market value. The provision also states that a trust shall be deemed not to deal with another trust at arm’s length if any person is beneficially interested in both trusts. Therefore, it is clear that any property transferred from an RRSP to a RRIF where the annuitant under both plans is the same, must be recorded at the property’s fair market value for the purposes of computing the applicable Part XI taxes under the Act.

Revenue Canada is required to administer the Act as written while the Department of Finance is responsible for determining tax policy and drafting income tax legislation. Since the concerns you have raised have tax policy implications, I have brought this issue to the attention of the Department of Finance.

I trust my comments will be of assistance to you.

		Yours sincerely,

		Bill McCloskey
		Assistant Deputy Minister
		Policy & Legislation Branch
M. Sarazin
952-9853
November 2, 1998
982429