3 September 1997 External T.I. 9720695 - OVERCONTRIBUTION DUE TO LOCK-IN AGREEMENT

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:

Would overcontribution taxes apply where an amount is transferred to an RRSP in accordance with a locking-in agreement but amount is not transferable under the Act?

Position:

Yes, Act is clear

Reasons:

Case has never come up because most locking-in agreements are restricted to transferable amounts. We would recommend that taxpayer seek to have locking-in agreement amended and, failing that, recommend that administrative relief be provided by the local TSO.

	                       	     972069
XXXXXXXXXX	                           M.P. Sarazin

Attention: XXXXXXXXXX

September 3, 1997

Dear Sirs:

Re: RRSP - Death of Annuitant

This is in reply to your letter dated June 2, 1997, wherein you requested our comments regarding the taxation of an unmatured locked-in registered retirement savings plan ("RRSP") where the annuitant dies in one year and you are not advised of the annuitant's death until a couple of years later. In our telephone conversation of September 2, 1997 (XXXXXXXXXX/Sarazin), you advised that you did not have an actual situation but, in fact, you would use the information provided to update internal manuals.

The term "locked-in RRSP" has no meaning under the Act. A locked-in RRSP is an ordinary RRSP which is subject to a locking-in agreement attached to the RRSP contract which requires that the RRSP be held to provide a periodic pension income to the annuitant after reaching a certain age. This requirement is not imposed by the Act, but by the relevant provincial or federal pension standards legislation.

In the case of an unmatured RRSP, the deceased annuitant is deemed to have received a benefit out of the RRSP in the year of death equal to the fair market value of all the property of the plan at the time of death pursuant to paragraph 146(8.8)(a) of the Income Tax Act (the "Act"). This amount is included in the deceased annuitant's income for the year of death pursuant to paragraph 56(1)(h) of the Act. A deduction from the amount deemed to have been received is available pursuant to subsection 146(8.9) of the Act with respect to a specified fraction of the total "refunds of premiums" in respect of the RRSP.

Any amount paid to the spouse of the deceased annuitant as a consequence of the annuitant's death after you are advised of the annuitant's death is considered a "refund of premiums" as defined in subsection 146(1) of the Act except for that portion which is a "tax-paid amount". "Tax-paid amount" is defined in subsection 146(1) of the Act as the amount taxable in the RRSP trust by virtue of paragraph 146(4)(c) of the Act without taking into account any deduction permitted under subsection 104(6) of the Act. Consequently, where the annuitant died in 1995, tax is payable under paragraph 146(4)(c) on the RRSP trust's taxable income for the 1997 and subsequent taxation years.

Where the deceased annuitant claims a deduction under subsection 146(8.9) of the Act with respect to the total refund of premiums, the surviving spouse is subject to tax on the refund of premiums received out of the RRSP in the year paid (presumably in the current year when you are notified of the annuitant's death) pursuant to subsection 146(8) and paragraph 56(1)(h) of the Act. The amount which is a "refund of premiums" which is used by the spouse in the current year or within 60 days of the end of the current year to contribute to his or her RRSP or RRIF can be deducted by the spouse for the current taxation year pursuant to 60(l) of the Act.

The tax-paid amount is received tax free by the spouse since it is excluded from the definition of "benefit" in subsection 146(1) of the Act. This amount is not eligible for a paragraph 60(l) tax-free transfer to an RRSP or RRIF. Where the RRSP trust is subject to tax on its taxable income in 1997, a deduction may be claimed pursuant to paragraph 104(6)(a.2) of the Act equal to the amount of taxable income earned in 1997 which is paid to the surviving spouse in 1997. If the RRSP trust claims a deduction under paragraph 104(6)(a.2) of the Act, this amount is taxable to the surviving spouse as a "benefit" under subsection 146(8) of the Act and is not eligible for a tax-free transfer to an RRSP or RRIF pursuant to paragraph 60(l) of the Act.

Where the terms of the locking-in agreement require that the full amount held in the deceased's RRSP be transferred to the surviving spouse's RRSP (which will also be subject to a locking-in agreement), the surviving spouse may have an overcontribution to his or her RRSP when the full amount is transferred. The overcontribution would result because the tax-paid amount and the benefit under 146(8) of the Act (hereinafter referred to collectively as the "Non-Transferable Amounts") which would make up part of the amount transferred to the surviving spouse's RRSP are not eligible for transfer under 60(l) of the Act. Consequently, the surviving spouse's RRSP could be subject to the overcontribution tax under Part X.1 of the Act unless the locking-in agreement is amended to allow for the withdrawal of the Non-Transferable Amounts or the surviving spouse claims some of his or her unused RRSP deduction room, if any, in respect of the Non-Transferable Amounts. The expression "unused RRSP deduction room" has the meaning assigned by subsection 146(1) of the Act.

We are not aware of any locking-in agreements under provincial or federal pension legislation that have resulted in amounts having to be transferred to an RRSP where it is known that the amounts would be subject to the overcontribution penalties imposed under the Act.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch