10 February 1999 Ministerial Letter 9833488 - NON-QUALIFIED INVESTMENT IN A RRIF

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: Non-qualified investment in a RRIF

Position: Income inclusion to the annuitant when acquired

Reasons: Subsection 146.3(7)

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your letter of December 3, 1998, concerning the income tax consequences arising from an investment transaction that took place in 1996, which resulted in a taxable withdrawal from your Registered Retirement Income Fund (RRIF) account.

In previous correspondence to you from Mr. K. M. Burpee, former Assistant Deputy Minister, Assessment and Collections Branch, you were advised that because funds were withdrawn from your RRIF, they were to be included in your taxable income. You now advise us that your broker erred in executing the investment transaction and it was that error that led to the withdrawal from the RRIF. In this regard, you provided us with a copy of a letter you received from XXXXXXXXXX. However, the income tax consequences arising from the investment transaction, being the income inclusion for the RRIF withdrawal, are correct in law and the Department has no authority to provide an alternative assessing action. The manner in which the investment transaction was carried out resulted in these tax consequences.

I would like to outline the income tax consequences provided under the Income Tax Act, where a RRIF acquires a non-qualified investment. It is our understanding that you directed your broker to acquire an investment that was a non-qualified investment for a RRIF (a Japan index call option). Rather than have your RRIF acquire the investment, your broker executed the trade in your non-registered account, and transferred funds from your RRIF to your non-registered account to provide the funds to purchase the investment. This transfer from your RRIF account resulted in the income inclusion from the RRIF for the 1996 taxation year.

Where a RRIF acquires a non-qualified investment, subsection 146.3(7) of the Income Tax Act requires an income inclusion to the annuitant of the RRIF of an amount equal to the fair market value of the investment at the time it was acquired by the RRIF. Where the RRIF subsequently disposes of the non-qualified investment, the annuitant of the RRIF is entitled to a deduction, under subsection 146.3(8) of the Income Tax Act, of an amount equal to the amount included in income, or if a lesser amount, the proceeds of disposition of the investment.

To summarize, the Income Tax Act does not preclude the acquisition of non-qualified investments by a RRIF but provides for an income inclusion should a RRIF acquire such an investment. It also provides for a deduction should the RRIF dispose of the non-qualified investment. Had the investment transaction you desired been executed by your RRIF, the tax consequences described above would have applied. However, since the transaction did not occur in your RRIF, these rules are not applicable.

If you have any further questions regarding this matter, I invite you to contact Mr. Paul Lynch of our Income Tax Rulings and Interpretations Directorate, by telephoning (613) 957-8979 or by writing to 25 Nicholas Street, 15th Floor, Albion Tower, Ottawa, Ontario K1A 0L5. Mr. Lynch is aware of our correspondence and will be pleased to assist you.

I trust I have addressed your concerns.

		Yours sincerely,

		Bill McCloskey
		Assistant Deputy Minister
		Policy and Legislation Branch

P. G. Lynch
957-8979
January 19, 1999
983348