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.
Principal Issues: Tax treatment of prohibited investments acquired before March 23, 2011
Position: 1. The 50% prohibited investment tax does not apply. 2. Subject to transitional relief, the 100% advantage tax applies to any income earned, and the portion of any realized capital gain that accrued, after March 22, 2011. 3. The transitional relief provides that any income earned, and the portion of any capital gains accrued and realized, after March 22, 2011 and before 2022 on prohibited investments held on March 23, 2011 will not be subject to the 100% advantage tax, but instead will be included in the annuitant's regular income. The annuitant must file an election before July 2012 and withdraw the income and capital gains (net of capital losses) from their RRSP or RRIF within 90 days after the end of the year in which it is earned or realized. 4. Income is considered to be earned when recognized as income under general tax rules. The portion of a capital gain or capital loss accrued after March 22, 2011 is to be determined by reference to the fair market value of the property on March 22, 2011.
Reasons: Application of the law.
XXXXXXXXXX 2011-041816
D. Wurtele
February 3, 2012
Re: RRSP and RRIF Prohibited investments
This is in response to your email of August 24, 2011 concerning the rules for prohibited investments held by registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) that were recently enacted as part of Bill C-13.
Our Comments
A prohibited investment for an RRSP or RRIF trust is defined in subsection 207.01(1) of the Income Tax Act (the "Act") and may generally be considered to be an investment to which the RRSP or RRIF annuitant is closely connected. A prohibited investment includes:
- a debt of the annuitant;
- a debt or share of, or an interest in, a corporation, trust or partnership in which the annuitant has a significant interest (defined in subsection 207.01(4) of the Act as generally a 10% or greater interest); and
- a debt or share of, or an interest in, a corporation, trust or partnership with which the annuitant, or an entity described in the previous bullet, does not deal at arm's length.
A prohibited investment also includes property prescribed by section 5001 of the Income Tax Regulations (the "Regulations"). This provision applies to certain small business, venture capital and co-operative investments that were qualified investments solely because of subsection 4900(14) of the Regulations, but which no longer satisfy the qualification conditions.
Two categories of property are specifically excluded from the application of the prohibited investment rules by section 5000 of the Regulations. The first category is for mortgage loans that are insured by the Canada Mortgage and Housing Corporation or by an approved private insurer. The second is for investments in certain retail mutual funds that operate under the requirements of National Instrument 81-102. This exclusion applies only for the fund's first two taxation years.
If an RRSP or RRIF trust acquires a prohibited investment or if an existing investment becomes prohibited, subsection 207.04(1) of the Act provides that the RRSP or RRIF annuitant is subject to a tax equal to 50% of the fair market value of the investment. The tax is refundable under subsection 207.04(4) of the Act in cases of inadvertence provided that the investment is disposed of before the end of the following year (or such later time as is permitted by the Minister). In addition, any income or capital gain attributable to a prohibited investment is treated as an advantage and is subject to a 100% tax, payable by the annuitant, under section 207.05 of the Act.
The prohibited investment tax applies to RRSP and RRIF investments acquired after March 22, 2011. An exception in the coming-into-force rules ensures that the subsequent transfer of a pre-March 23, 2011 prohibited investment between RRSPs or RRIFs of the same annuitant does not result in the investment becoming subject to the tax. The tax also applies to pre-March 23, 2011 investments that first become prohibited after October 4, 2011.
The advantage tax applies to any income earned, and the portion of any realized capital gain that accrued, after March 22, 2011, regardless of when the prohibited investment generating the income or gain was acquired by the RRSP or RRIF. Transitional relief from this tax is available under subsection 207.05(4) of the Act for prohibited investments held by an RRSP or RRIF on March 23, 2011. The transitional relief provides that any income earned, and the portion of any capital gains accrued and realized, after March 22, 2011 and before 2022 on these investments will not be subject to the advantage tax, but instead will be included in the annuitant's regular income.
To take advantage of the transitional relief, the annuitant must file RC341 Election on Transitional Prohibited Investment Benefit for RRSPs or RRIFs. This election must be filed with the Canada Revenue Agency before July 2012. The annuitant will be required to withdraw from their RRSP or RRIF within 90 days after the end of the taxation year in which the income or gains are earned or realized an amount equal to their "transitional prohibited investment benefit" for the year. An individual's "transitional prohibited investment benefit" for a taxation year is defined in subsection 207.01(1) of the Act as the total of any income earned and capital gains realized in the year on prohibited investments held on March 23, 2011 less any capital losses realized on these investments in the year.
For the purposes of these rules, we consider that the amount of a capital gain realized on a prohibited investment held on March 23, 2011 to be the positive difference between the fair market value of the property when it is disposed of by the RRSP or RRIF or when it ceases to be a prohibited investment (less reasonable costs of disposition, if any) and the fair market value of the property on March 22, 2011. The amount of a capital loss is the negative difference. In addition, we consider that income on a prohibited investment is earned when it is recognized as income under general tax rules. For example, trust income is generally considered to be earned at the end of the taxation year of the trust. Dividend income is considered to be earned when received (but for purposes of these rules the dividend gross-up amount is to be disregarded).
We trust that these comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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