7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 2, 2016-0651711C6 F - RRIF, Transfer of designated benefit -- translation

Principal Issues: Does the designated benefit eligible to be transferred to the surviving spouse's RRIF or RRSP under paragraph 60(l) have to be reduced by the RRIF minimum amount when the transfer occurs in a year that is different than the year of death?

Position: Yes

Reasons: This is the result of the element C in the formula of the eligible amount in subsection 146.3(6.11).

7 OCTOBER 2016 APFF FEDERAL ROUNDTABLE ON FINANCIAL STRAEGIES AND INSTRUMENTS - 2016 CONFERENCE

Question 2

Tax consequences on death of RRIF annuitant

In summary, where a spouse receives a designated benefit (footnote 1) from a registered retirement income fund ("RRIF") that is taxable in computing his or her income, paragraph 60(l) allows him or her to claim an offsetting deduction equal to the total of the amounts paid:

• as a premium under a registered retirement income plan ("RRSP"),
• in order to purchase an annuity referred to in subparagraph 60(l)(ii),
• in consideration for a RRIF from a carrier.

By virtue of clause 60(l)(v)(B.2), the amount of the deduction claimed by the spouse may not exceed the "eligible amount" of the spouse for the year in respect of a RRIF. "Eligible amount" is defined in subsection 146.3(6.11) for the purposes of subparagraph 60(l)(v).

Specifically, the eligible amount of the surviving spouse in respect of the RRIF for a taxation year is the spouse's designated benefit for the year less a specified proportion of the designated benefit. In general terms, this proportion is equal to the minimum amount to be withdrawn from the fund for the year (other than a portion of the fund that was included in computing the annuitant's income for the year under the fund), divided by the total of the designated benefits in respect of the fund for the year.

Where the minimum RRIF amount has been withdrawn prior to death but the designated benefit is paid to the surviving spouse the following year, according to the CRA this amount should be included in the calculation of the eligible amount in subsection 146.3(6.11).

Consider the following situation:

Situation

• Death of Mr. X in November 2015;
• Immediately prior to his death, the fair market value ("FMV") of his RRIF was $140,000;
• The minimum RRIF amount for 2015 was $11,000 and was withdrawn in full by the deceased prior to the deceased's death;
• No increase in the RRIF between the date of death and the transfer to the surviving spouse (i.e., Ms. X);
• In January 2016, the entire RRIF ($140,000) is received by the legal representative of the deceased annuitant and transferred to Ms. X in the same year;
• Pursuant to subsection 146.3(6.2), an amount of $140,000 is deducted from the amount deemed to have been received by the deceased under subsection 146.3(6);
• The minimum RRIF amount for 2016 (automatically recalculated on January 1) is $10,000.

Question to the CRA

Can you confirm that Ms. X's eligible amount under subsection 146.3(6.11) is $140,000, so that this amount can be transferred to her RRSP/RRIF (or annuity) under subparagraph 60(l)(v)?

CRA response

Element C in the formula in subsection 146.3(6.11) of the Act is the lesser of:

(a) the total amounts included because of subsection 146.3(5) in computing the income of the deceased annuitant under the fund for the year in respect of amounts received or deemed to have been received by the annuitant out of or under the fund, and

(b) the minimum amount to be withdrawn under the fund for the year as defined in subsection 146.3(1).

To arrive at an eligible amount of $140,000, you are interpreting the phrase "for the year" in variable (a) of element C of this formula as referring to the year of death of the annuitant and you are using the year when the spouse received the designated benefit for the rest of the formula.

The CRA cannot confirm your interpretation of the computation of the eligible amount under subsection 146.3(6.11). The CRA is of the view that all elements of the formula refer to the same year, being the year referred to in the preamble of subsection 146.3(6.11). This year refers to the taxation year referred to in paragraph 60(l), which is the year of the inclusion of the designated benefit in computing the spouse's income under subsection 146.3(5).

In your example, the taxation year in element C of the formula in subsection 146.3(6.11) is the year 2016, which is the taxation year in which Mrs X is required to include the designated benefit in computing her income by reason of the combined application of subsections 146.3(6.1) and 146.3(5). Since the RRIF annuitant died in the prior year, the lesser of the amounts in variables (a) and (b) of element C of this formula will be the amount of variable (a), which is nil. Indeed, no amount will be included in computing the deceased annuitant's income by virtue of subsection 146.3(5) for the taxation year subsequent to that of death.

In your example, taking as given that the portion of the designated benefit of the individual which is included in computing the income of the spouse under subsection 146.3(5) is $140,000, then the eligible amount in your example would be $130,000.

In summary, although there is no requirement to pay the minimum amount after the death of the last annuitant under a RRIF where the withdrawal is made in a year subsequent to the year of death, the amount that the spouse of the deceased annuitant can claim as a deduction under paragraph 60(I) must be reduced by the "minimum" amount for the year.

Catherine Ayotte
(613) 670-8897
October 7, 2016
2016-065171

FOOTNOTES

Due to our system requirements, the footnotes contained in the original document are reproduced below:

1 For the purposes of subsection 146.3(1) ITA
2 Application of subsection 146.3(6) ITA