Canada - English

RRSP Investments in CCPCs - Don't Miss Key December 31, 2012 Transitional Relief Deadline - by Deb MacPherson 

Canadian Tax Adviser

 

November 20, 2012

 

Deb MacPherson
Calgary, National Enterprise Tax Leader

 

Certain taxpayers with registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) investments may need to make an important one-time tax election on or before December 31, 2012. Under anti-avoidance rules introduced in the 2011 federal budget, where the combined percentage interest in a company's shares held by the annuitant's RRSP or RRIF, the annuitant, or any non-arm's length person is 10% or more, these shares may be considered a "prohibited investment" by the CRA and subject to harsh penalties if no action is taken.

The rules provide some transitional relief for income and gains on prohibited investments held by an RRSP or RRIF on March 23, 2011 where taxpayers file an election by December 31, 2012 and remove the income or gains from those prohibited investments by March 31, 2013 for 2012 income and 90 days after year-end for income earned in subsequent years.

 

Background
The 2011 federal budget introduced anti-avoidance rules for investments held in an RRSP or RRIF. Under these rules, the annuitant of an RRSP or RRIF may be subject to a 50% penalty tax or a 100% advantage tax.

 

An investment held by the RRSP or RRIF that is considered a "prohibited investment" may be subject to a 50% penalty tax. However, prohibited investments held by an RRSP or RRIF on March 23, 2011 are grandfathered due to the coming-into-force rules for this legislation, and therefore are not subject to this tax.

 

Electing for transitional relief
Under the existing legislation, annuitants can file Form RC341, "Election on Transitional Prohibited Investment Benefit for RRSPs or RRIFs", to elect to have advantages earned or realized between March 23, 2011 and December 31, 2021 on grandfathered prohibited investments taxed at the annuitant's graduated Part I income tax rates (akin to a regular RRSP or RRIF withdrawal) rather than 100%, provided that the advantage is removed from the RRSP or RRIF within 90 days of the end of the calendar year in which it is earned or realized. The annual withdrawal from an RRIF can be considered a withdrawal of an advantage for purposes of these anti-avoidance rules. In other words, the withdrawal from the annuitant's plan would be taxed at regular tax rates, and not taxed under the punitive anti-avoidance rules.

 

In a recent comfort letter, Finance said it would recommend extending the election deadline to December 31, 2012 (from June 30, 2012, as legislated) and making the transitional income tax rate available indefinitely for such advantages. In other words, transitional relief would not expire on December 31, 2021.

 

For more information, contact your KPMG adviser.

 

 

 

 

 

 

Information is current to November 20, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

Publications

Canadian companies may be interested in these recent publications: