Tax season in Canada… When can you expect to see your slips, receipts and returns?

Ah, tax time in Canada.  April 30th.

So much fun… Really.  Organizations who issue tax slips, tax returns or contribution receipts have been working hard perfecting their processes since the end of the last tax reporting season and have been working through the summer putting any necessary changes in place and gearing up for the next tax season – which all begins next month in November for many top organizations.

Since issuing organizations are gearing up, so should you, the investor, start getting ready to file your income tax returns and to do that, it really helps if you have an idea as to which slips your investment(s) will generate and when you can expect them.

Of course, even if you do get all your slips, as expected, there could always be amended returns sent to you as well resulting from an error or late directional change from the company / fund.  Even the CRA likes make changes to their tax forms, or to the calculations contained therein and there is nothing you, nor your tax preparer can do, let alone the poor folks issuing your tax slips.  You have a slip, assume it to be correct and file to the CRA with it only to find out it’s incorrect when another version comes, with a letter, to be used instead.

Take 2010, for example… The CRA changed the dividend tax rate by something like 0.0007% and they did that 5 days before they expected T5 slips to have been received by holders and in actual fact, most of the T5’s were already issued with the incorrect rate before the CRA realized what they had done.

Since the CRA determined that the rate change would be adjusted internally, there was a communication fired out industry-wide notifying those who received T5’s that no further actions would be taken on the holder side and that they should not need to go back to their bank, financial institution or transfer agent to have it amended.  I remember a few individuals demanding their slips being amended for a total change of $7.00.  But this is what you do – with a smile when you’re in that industry.

Back to the topic.

One of the most common frustrations during tax preparation time comes from those holders who are eager to file but are unsure of what they are getting and when, roughly, it should arrive.

Keeping tabs on due dates can be quite difficult, especially if you’re getting them from an organization which has not fully embraced social media and are unable to provide you with a timeline, or expected dates per slip depending on what you should be receiving.

For example, T4 and T5 tax slips must be mailed out by February 28th whereas, tax slips for mutual funds, flow-through shares, limited partnerships and income trusts are not due until March 31st.

When there are late deadlines, like March 31st, a lot of pressure is then placed on your accountant as it creates a heavy backlog in April, when accountants must rush through the preparation of personal tax returns for their clients – sadly unable to give each return the care and oversight that they deserve.

I just don’t understand why all slips are not made available on the web or by email all by say March 10th in order to allow time for issuing organizations to prepare better their processes to allow for additional oversight and for time to correct errors.  This way organizations preparing the slips will have to begin auditing the slips traditionally due in February for errors and get the March ones completed – have them all merged together in the same file and made available sooner rather than later for the holder.  In addition, with a fixed deadline, the CRA or MRQ would then know when they can or cannot change slips or information on slips. 

Let’s look a little closer at some issues and potential solutions;

Year-end trading summaries

Banks and brokerages use year-end trade summaries to report proceeds and commissions on each sale. However, the proceeds reported are sometimes net of commissions, which can lead investors to erroneously deduct the reported commission number a second time.  In addition, many banks issue multiple slips for each investment account, but send a consolidated summary of the slips to the CRA, which causes havoc when there is a missing slip or a question regarding one of them.  

By keeping track of the totals or having them all come in March would allow the issuing organization time to audit and compare the slips to the summary before issuing to ensure they balance.

Another solution is for the issuing organization to make the slips available on their investor website and then holders can wait for the year-end summary to post – which of course would balance – and then before a holder does anything with their slips they can be comfortable that they balance.

An additional bonus would be for the issuing organization to also provide the calculations behind the slips on the website so that if there is a discrepancy, the holder can look to see how the slips were calculated and they can also learn more about how taxes are calculated.  It’s a win-win situation.  Accurate reporting and teaching the holder more about taxes. 

Gain and loss reports

Many privately managed bank funds prepare gain and loss reports for clients. However, where there are US stock sales, often the cost reflects the US dollar purchase amount at the current year’s exchange rate, rather than at the time of purchase. 

Traditionally, the onus is on the holder to figure out the historic exchange rate and the issuing organizations can and should assist by making this information available on their website for ease of balancing.  They should also make sure that there is accurate and complete documentation on their website and on all reports indicating the rate used and the rate needed for reporting.

T3 and T5013 tax slips

These are the two main slips which have a mailing deadline of March 31st because the trust/partnership has to finalize their books and prepare their tax returns in order to know the breakdown of the distributions so that the individual holders can then have their tax returns rushed to them – a high risk process indeed.  So once the T5’s have been received and accounted for, issuing organizations like transfer agents have only a month or less to then prepare the T3 and T5013 slips.

Let’s be honest here, it’s more like 2-3 days, due to the complexity of the partnership returns and one way around this is to ensure that any issuing organization is capable to preparing T5013’s by themselves, or that they have an organization capable of preparing them in an expedited manner.  In addition, the partnership should be contacted to let them know that the quicker they get their books in order, the quicker the rest of the slips can be prepared.  If enough people come forward, I guarantee it will get done faster.

Final Review:

When reviewing your slips before filing your tax return, keep in mind a few small differences;

T4’s vs. T4A’s – A T4 is issued by your employer and reflects the income you earned during the year, as well as showing the amount of deductions you had removed from your pay, such as; CPP, Employment Insurance (EI) and tax.  A T4A, on the other hand, is issued by a pension plan administrator and reflects the pension income you received from a pension source. T4As will not have figures listed for CPP or EI contributions since these are not deducted from pension income.

The T5 investment income slip – identifies the various types of investment income that residents of Canada have to report on their income tax and benefit returns.  T5’s are NOT issued to report income paid to non-residents of Canada, however, if you earned US interest on your investments, it will show up on your T5, with a note at the bottom saying that the interest is in US dollars.

It’s not always clear to the holder that this figure needs to be converted at the average exchange rate for the year, as set out by the CRA.   T5 slips also have both eligible and ineligible dividend boxes, which holders can accidentally reverse on their returns.

Investment loan interest

Most banks do not issue receipts for interest on investment loans unless specifically requested, resulting in a missed deduction for the client.  Borrowers should request receipts well in advance of the tax-filing deadline to ensure they arrive in time.

All in all, it’s best to keep track of investments you have and to check off when they are expected and when they are received in order to ensure you can file at your earliest convenience or reach out and ask your issuing organization / bank / transfer agency to step up and find a solution.

It’s never to early.

Even in October.

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Canada Revenue Agency Form T550; Application for Registration of RSP, ESP and RIF.

The other day a colleague of mine asked me what I knew about the form T550, and to be honest, I knew just the basics from my days working at the CRA.

I googled the form and was very surprised to see there was very little information available so I started to research and here was what I found;

What is this form: The T550 is a form used to apply for registration of; Retirement Savings Plans (RSP), Education Savings Plans (ESP) and Retirement Income Funds (RIF).

Who uses this form:  Use this form if you are an RSP issuer as described in subsection 146(1) of the Income Tax Act (ITA), an ESP promoter as described in subsection 146.1(1) of the ITA or if you are a RIF carrier as described in subsection 146.3(1) of the ITA.

If you want to know more about these sections of the ITA, follow this link and enjoy.  If you can wait, I’m writing a post on that section, transferring the content from ITA language into English where possible.

http://laws-lois.justice.gc.ca/eng/acts/I-3.3/page-240.html

RSPs and RIFs:

The CRA expects to see the T550 form; Fillable English version – http://www.cra-arc.gc.ca/E/pbg/tf/t550/t550-fill-12e.pdf along with the CD-Rom / DVD outlining the list of contracts or arrangements that are going to be registered with the CRA sent to the Registered Plans Directorate in Ottawa. K1A 0L5.   

For information on how to issue and register these contracts or arrangements, including the information to include in the list, see Information Circular IC72-22, Registered Retirement Savings Plans and IC78-18, Registered Retirement Income Funds.  

You have to submit this form and the CD-ROM / DVD no later than 60 days after the end of the calendar year in which you issues the contracts or agreements.  Include a chart that lists all the specimin plan or fund names and numbers, the total number of contracts / arrangements for each specimenplan or fund, and the calendar year the contracts/arrangements were entered into.  A separate Form T550, must be submitted for each specimen plan or fund included on the CD-ROM or DVD-ROM.  Listing can be filed in ASCII or XML format.

For detailed information on filing in the ASCII or XML format, visit our Web site at  www.cra-arc.gc.ca/tx/rgstrd/rrsprrif-reerferr/mgflng-eng.html

ESPs:

For ESP contracts entered in to after 2003, the submission of contract inforamtion to the Canada Education Savings Program (CESP) is considered a request of registration. Contract information must be submitted to the CESP no later than 60 days after the end of the calendar year the plan was entered into. No Form T550 is required for these ESP registration requests.

For ESP contracts that cannot be submitted to the CESP because of residency or SIN requirements but that meet conditions set out in subparagraph 146.1(2)(g.3)(i) and/or paragraph 146.1(2.3)(b) of the Act, requests for registration must be submitted as a paper list and include a separate Form T550 for each specimen plan.  These requests must be submitted no later than 60 days after the end of the calendar year the plan was entered into.

For information on how to issue and register ESP’s, refer to Information Circular IC93-3, RESP’s.  

You are reminded that when an RRSP issuer opens a contract under a specimen plan, they are obligated to apply to the CRA to have these contracts registered within 60 days of the end of the calendar year. Such reporting is done by filing a completed Form T550 or providing CRA with the required information. This information is required for each specimen, under which contracts were sold, together with a CD-ROM listing the contract account numbers, names, addresses, and SIN’s pertaining to the contracts.  Transmitting the accurate information to CRA ensures that the plans sold in the year under the specimen are properly registered.

 

Here are the Information circular’s referred to in the above guide;

 

IC 72-22R9 – June 17, 1996

1. This circular interprets certain provisions of the Income Tax Act (the Act) that apply to registered retirement savings plans (RRSPs) and outlines the Department’s rules for companies that issue RRSPs.

2. This circular has five parts:

Part I – Approval (paragraphs 3-20)
Part II – Registration (paragraphs 21-27)
Part III – Annuities (paragraphs 28-32)
Part IV – Receipts (paragraphs 33-40)
Part V – General (paragraphs 41-45)

PART I – APPROVAL

AUTHORITY – SECTION 146 OF THE INCOME TAX ACT

3. The following can issue RRSPs:

(a) companies that are licensed to carry on an annuities business in Canada (e.g., insurance companies);
(b) Canadian trust companies;
(c) corporations that have been approved by the Governor in Council to sell investment contracts for RRSPs; and
(d) a depositary defined in section 146 of the Act as:
              (i) a member or a person eligible to become a member of the Canadian Payments Association (CPA); or
             (ii) a credit union that is a shareholder or member of a central corporate body for purposes of the CPA Act.

This circular provides comments directly to you, the issuer of a retirement saving plan (RSP), concerning the administration of the plan.

4. The term “annuitant” as defined in subsection 146(1) of the Act is the individual for whom the RSP provides the retirement income. If the annuitant dies after the plan has matured, the annuitant’s spouse may become the annuitant.

We have to approve an RSP specimen plan before any contracts can be registered and sold under that plan. Contributions can only be deducted in respect of registered plans. Therefore, an RSP should not be sold until we have given approval.

5. The following documents make up a specimen plan.

(a) For an RSP issued by a company described in 3(a) above the following documents are required:

     (i) a copy of the complete contract (policy, application form, schedules, and any riders or locking-in addenda);
     (ii) a copy of the endorsement needed to qualify the contract for registration as an RRSP, unless the contract itself is a self-contained RSP; and
    (iii) a copy of the annuitant’s application form requesting that the contract be registered as an RRSP, if not contained in the policy application or RSP endorsement.
(b) For an RSP issued by other than an insurance company the following documents are required:
     (i) a copy of the declaration of trust or text of the arrangement, and any applicable locking-in addenda;
     (ii) a copy of the application form; and    
     (iii) if requested, confirmation from the CPA of the depositary’s status as referred to above in 3(d)(i).

PLAN TEXT

6. The RSP must not provide for any of the following:

(a) The RSP cannot provide for the payment of any benefit before maturity except:

     (i) a refund of premiums in a lump sum; and
     (ii) a payment to the annuitant.
(b) The RSP cannot provide for the payment of any benefit after maturity except:
     (i) retirement income to the annuitant;
     (ii) full or partial commutation of retirement income under the plan to the annuitant; and
     (iii) commutation referred to in 7(c) below.
(c) The RSP cannot provide for a payment to the annuitant of a retirement income except by:
     (i) equal annual or more frequent periodic payments until there is a payment in full or partial commutation of the retirement income; and
     (ii) when the commutation is partial, equal annual or more frequent periodic payments afterwards.
(d) The RSP cannot provide for periodic payments in a year under an annuity after the death of the first annuitant that total more than the payments under the annuity in a year before the death.
(e) The RSP cannot provide for the payment of any premium after maturity.

7. The RSP must provide for the following:

(a) maturity no later than the end of the year in which the annuitant reaches 71 years of age;
(b) payment of an amount to a taxpayer to reduce the amount of tax the taxpayer would otherwise have to pay because of over- contributions by the taxpayer; and
(c) the commutation of each annuity payable that would otherwise become payable to a person other than an annuitant under the plan.

8. The RSP must include provisions that do the following:

(a) The annuitant or a person with whom the annuitant was not dealing at arm’s length cannot receive an advantage that is conditional on the existence of the plan, other than:

     (i) a benefit;
    (ii) amounts included in a deceased annuitant’s income or included in the income of an RRSP trust for years that the trust has lost its exempt status due to the death of the last annuitant;
 (iii) the payment or allocation of any amount to the plan by the issuer;
 (iv) an advantage from life insurance in effect on December 31, 1981; or
  (v) an advantage obtained from administrative or investment services provided for the plan.
(b) The RSP must prohibit all or any part of the retirement income from being assigned.
(c) For a depositary, the RSP must clearly state that:
     (i) the depositary cannot use the property held under the plan to offset any debt or obligation owing to the depositary; and
   (ii) the property held under the plan cannot be pledged, assigned, or in any way alienated as security for a loan or for any purpose other than to provide the annuitant with a retirement income starting at maturity.

Where an advantage, for example a gift, that is prohibited under paragraph 8(a) above, is extended to an RRSP annuitant, you may be assessed a penalty under subsection 146(13.1) of the Act. For more information on the application of subsection 146(13.1) please refer to IT-415 Deregistration of Registered Retirement Savings Plans.

APPLICATION FORM

9. A specimen plan consists of an application form and the specimen text. The application form has to request the following information:

(a) the annuitant’s name, address, social insurance number, and date of birth;
(b) the contributor’s name and social insurance number, if other than the annuitant;
(c) the annuitant’s signature (the contributor who is not the annuitant does not sign the application form);
(d) the contract number (account, certificate or identifying number);
(e) the issuer’s name;
(f) the signature of an authorized officer of the issuer accepting the application.

The application form has to include a clause in which the annuitant requests the issuer to apply for registration of the plan as an RRSP under section 146 of the Act. If the specimen plan is for a particular employer, association, or other organization, the application form has to include a clause in which the annuitant authorizes the applicable organization to act as the annuitant’s agent.

10. Do not use the word “registered” or the full acronym RRSP when referring to the name of the plan in the application form or specimen documents. This is because only the individual arrangements issued in the approved form are registered, and not the specimen itself. (See Part II, Registration.)

11. Submit your draft of the proposed RSP to:

Registered Plans Division
Revenue Canada
700 Industrial Avenue
Ottawa ON K1A 0L8

GROUP RSPS

12. An association, employer, or other organization can sponsor a group RSP. A group RSP is essentially a collection of individual RRSPs for the employees or members of the applicable organization. Individuals belonging to the organization or their spouses are eligible to participate. The organization can act as agent for the annuitant for certain purposes, such as receiving contributions to the RSP. If applicable, the text of the RSP contract and its application form should clearly show that the annuitant has authorized the organization to act as his or her agent and for what purpose.

13. When the organization acts as agent for the annuitant the plan has to state that the ultimate responsibility for the administration of each plan remains with you, as issuer. You have to deal directly with the Department concerning all RSP matters and reporting requirements unless we have your written authorization to deal with another person. The organization may not make changes to the approved specimen plan.

AGENCY AGREEMENT

14. You may have an agreement with an agent, such as an investment broker, that allows the agent to provide you with certain administrative and investment functions. It is not necessary to submit the agency agreement with the specimen plan. If you appoint the agent as custodian of the securities, and the securities are registered in the agent’s name, then the agency agreement, the identity of the trustee, and the contract or identification number of the RRSP that governs the trust should be clearly disclosed in the security registration form.

15. The specimen plan must contain a clause stating that the ultimate responsibility for the administration of each plan remains with you, as issuer. The agent cannot make changes to the approved specimen plan.

LOCKED-IN RRSPS

16. As issuer, you may set up an RSP specifically for locked-in registered pension plan funds. If a locking-in addendum or supplementary agreement is used together with an existing specimen plan, separate accounts have to be kept for the locked-in and non- locked-in portions.

NOTIFICATION OF ACCEPTANCE

17. We will notify you when the RSP can be accepted for registration as an RRSP, and will request a final printed copy of the documents that constitute the specimen plan.

AMENDMENTS OR REVISIONS

18. We should approve all amendments or revisions to the specimen plan before the amendments are put into effect. Your submission to us should identify the nature of each change.

If you amend the specimen plan to accommodate the transfer of locked-in registered pension plan funds, you have to include a copy of the locking-in addendum or supplementary agreement.

CHANGE OF ISSUER

19. The terms of your specimen plan may allow you to resign as the issuer and appoint a successor issuer. This is generally considered to be an amendment to the specimen plan. To process the change, we need a letter telling us that the issuer has changed, and giving the effective date of the change. We also need confirmation from you or from the successor issuer that each annuitant who has a contract conforming to the specimen plan has been informed of the change. The successor issuer should send any amendments to the specimen plan resulting from the change to us for approval at the address in 11 above.

TERMINATION OF THE INACTIVE SPECIMEN PLAN

20. You should advise us when you are no longer selling individual plans under the specimen plan. Also notify us when there are no longer any outstanding individual plans that conform to the specimen plan so that we can close our files.

PART II – REGISTRATION

21. The address to register RSPs is:

Registered Plans Division
Revenue Canada
700 Industrial Avenue
Ottawa ON K1A 0L8

22. To register RSPs for new annuitants, you have to:

(a) provide us with a list of the plans and include:

     (i) the name, address, and social insurance number of each annuitant; and
    (ii) contract numbers you have assigned for each arrangement (contract, account, certificate, or id number); and
(b) identify:
     (i) the name of the specimen plan and the number assigned by us to the specimen plan; and
    (ii) the calendar year or the period, such as the first 60 days of the calendar year, in which the plans listed were set up.

23. You can submit lists on a quarterly or other basis, but not later than 60 days after the end of the calendar year for which you want the plans to be registered. Include with each list a separate Form T550, Application for Registration of Retirement Savings Plans or covering letter for each specimen plan with the signature of an authorized officer of the issuer who:

(a) affirms that:

     (i) the annuitants of the plans listed have requested registration of their plans;
    (ii) the contracts or arrangements listed comply with the provisions of section 146 of the Act; and
   (iii) the plans conform in all respects with the specimen plan approved by us and identified on the list; and
(b) states:
     (i) the number of contracts or arrangements listed for each specimen plan, including the assigned number; and
    (ii) the number of pages of the list.

Please do not submit lists as an attachment to Form T3R-G, Registered Retirement Savings Plan Group Information Return.

24. Each plan can be registered only once. Use a separate notice for corrections such as names or social insurance numbers.

25. You cannot list a plan for registration until you receive a contribution, as the plan doesn’t exist until the payment is received.

LOCKED-IN REGISTERED PENSION FUNDS

26. For all jurisdictions in Canada that have pension legislation, the term locking-in generally means that benefits cannot be cashed out either before or after maturity. Transfer to a registered retirement income fund may generally be made if it is a locked-in fund. When a locked-in RRSP matures, the total value of the plan must be used to purchase a life annuity contract.

27. The federal Pension Benefits Standards Act, 1985 (PBSA) or the equivalent provincial law allows the transfer of locked-in registered pensions to an RRSP provided the RRSP meets the federal or provincial RRSP conditions for locked-in pension funds. The PBSA governs the Northwest Territories and Yukon, as well as federally regulated industries.

PART III – ANNUITIES

RETIREMENT INCOME

28. Generally, the Act defines retirement income in subsection 146(1) to include a life annuity with or without a guaranteed term, or a fixed-term annuity that provides benefits up to and including the age of 90. The guaranteed term for a life annuity cannot be more than 90 minus:

(a) the annuitant’s age in whole years at the maturity of the plan; or
(b) if the annuitant’s spouse is younger than the annuitant and the annuitant so elects, the spouse’s age in whole years at the maturity of the plan.

NOTICE OF PURCHASE OF ANNUITY

29. When you, as the issuer, arrange for the purchase of an annuity with the RRSP funds, you should complete Form T2037, Notice of Purchase of Annuity with ‘Plan’ Funds, and give a copy to the issuer of the annuity. When you directly provide the annuity, however, Form T2037 is not necessary.

30. To find out what forms an annuitant should use when directly transferring to or from an RRSP or when purchasing an annuity, please refer to Information Circular 79-8, Forms To Use To Directly Transfer Funds To Or Between Plans, Or To Purchase An Annuity, as well as the latest version of the RRSP and Other Registered Plans For Retirement guide.

31. The commuted RRSP annuity can be used to purchase another life annuity for the annuitant. The annuity can be for the life of the annuitant (or the lives jointly of the annuitant and the annuitant’s spouse), with or without a guaranteed term, or it can be a fixed-term annuity providing benefits up to and including the age of 90. The guaranteed term in years for a life annuity cannot be more than 90 minus:

(a) the annuitant’s age at the time of the acquisition; or(b) the age of the annuitant’s spouse at the time of acquisition.

32. A trust governed by an RRSP or another authorized entity can acquire an annuity contract (as described by the definition “retirement income” in subsection 146(1) of the Act) prior to the date of maturity of the RRSP and defer the commencement of the payments until the plan’s maturity date. We consider the deferred life annuity contract to be an investment of the RRSP funds and not a method of providing an immediate retirement income. The annuity contract has to be owned by the trust or other entity.

PART IV – RECEIPTS

33. Each year you should issue a receipt to the annuitant for contributions made by the annuitant, or for property received as a result of a transfer of a commuted RRSP annuity. If the annuitant’s spouse contributed to the plan, you should instead give the receipt to the spouse. The receipt cannot be more than 8 1/2 inches wide and should state that it is a receipt for an RRSP. In addition to giving instructions to submit the receipt with the contributor’s income tax return, the receipt has to include the following:

(a) the name of the issuer of the RRSP;
(b) the signature of an authorized official (we will accept a facsimile signature as long as the receipts are numbered serially and a copy is kept at the issuer’s head office);
(c) the contract or arrangement number;
(d) the name, address, and social insurance number of the annuitant;
(e) the name and social insurance number of the contributor if other than the annuitant;
(f) the total amount of premiums paid;
(g) the dates of payment of premiums (the receipt may show the amount received in the initial 60 days of the year and the amount received during the remainder of the year); and
(h) whether the contributions (premiums) were in whole or in part in kind, using the following text:
Contributions were in whole or in part in kind. () (check)

You should advise the annuitant to submit an explanation of any contribution in kind with his or her income tax return.

34. You may issue a receipt for each premium payment or for more than one payment. You may issue receipts for more than one payment twice a year. The first receipt is for payments made in the initial 60 days of the calendar year, and the second receipt is for payments made in the balance of the calendar year.

35. If you only issue one receipt for a fiscal period ending 60 days after the end of a calendar year, the receipt should identify the total payments you received prior to January 1, and the total payments received in the 60-day period on or after January 1. If only a part of a premium payment is for an RRSP, the receipt should indicate the amount that qualifies as an RRSP contribution for income tax purposes. A duplicate receipt should be clearly identified as a copy for the annuitant’s records.

INSTANT RECEIPTS

36. An instant receipt is one which is provided to the contributor at the time the contribution is made. All enquiries and matters concerning instant receipts should be directed to:

T1 Programs Division
Revenue Canada
Ottawa ON K1A 0L8

You can issue instant receipts for premiums as long as the receipts are not issued for any rollover or direct transfer of property. The instant receipts should contain the same information requested in 33 above, and should be typewritten, produced on a cheque printer, or computer-generated. We recommend sending a draft of the receipt specimen to the T1 Programs Division.

37. You can issue instant receipts without a contract number, but you should give the annuitant the contract number at a later date. Issue duplicate and amended receipts with a contract number as well as a reference to the original receipt number.

38. Please clearly indicate on the receipt if the contributor’s spouse is the annuitant.

39. You should retrieve an instant receipt if it was issued in error, or if the receipt became invalid due to a stop payment or a non- sufficient funds (NSF) cheque. If all copies of an invalid receipt are not returned, we ask that you inform us as follows including the annuitant’s name, social insurance number, and the receipt number:

(a) for contributors served by the Ottawa, Toronto Centre, Toronto West, Toronoto East  or Toronto North TSO’s, inform the Assistant Director of Client Assistance at the appropriate office;
(b) For all others, inform the Assistant Director of Enquiries and Adjustments at the taxation centre that serves the annuitant.

40. If you cannot account for any unissued instant receipts, you have to provide the T1 Programs Division with any missing receipt numbers.

PART V – GENERAL

41. A taxpayer who contributes to an RRSP any time during the year or no later than 60 days after the end of the year is eligible to deduct RRSP contributions from income, as long as the taxpayer or the taxpayer’s spouse is the annuitant. The taxpayer can deduct all or part of the contributions (other than certain rollovers and other exempted amounts) made no later than 60 days after the end of the year from his or her income for that year. These deductions are subject to the limitations in the Act.

42. A trust governed at any time in the year by an RRSP has to file an income tax return.

43. For detailed information on reporting and deduction requirements, taxation of a trust, and foreign property issues, please refer to the following publications: T4RSP and T4RIF Guide, IT-320, Registered Retirement Savings Plans – Qualified Investments, and IT 412, Foreign Property of Registered Plans.

44. The following publications have RRSP information. They are available at any Revenue Canada tax services office:

RRSP and other Registered Plans for Retirement Guide T4RSP and T4RIF Guide

IT-124 Contributions to Registered Retirement Savings Plans
IT-307 Spousal Registered Retirement Savings Plans
IT-320 Registered Retirement Savings Plans – Qualified Investments
IT-408 Life Insurance Policies as Investments of Registered Retirement Savings Plans and Deferred Profit Sharing Plans
IT-412 Foreign Property of Registered Plans
IT-415 Deregistration of Registered Retirement Savings Plans
IT-500 Registered Retirement Savings Plans (maturing after June 29, 1978) – Death of Annuitant after June 29, 1978
IC 74-1 Form T2037, Notice of Purchase of Annuity with “Plan” Funds
IC 76-12 Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Treaty Countries
IC 77-16 Non-Resident Income Tax
IC 78-14 Guidelines for Trust Companies and Other Persons Responsible for filing T3R-IND, T3R-G, T3RIF-IND, T3RIF-G, T3H-IND, T3H-G, T3D, T3P, T3S, T3RI and T3F Returns
IC 79-8 Forms to be Used for Direct Transfer of Funds to or Between Plans or for the Purchase of an Annuity

PERSONAL INFORMATION

45. Information that we obtain for taxation purposes is strictly confidential. Only the taxpayer or a person the taxpayer or the law authorizes has access to this information. The Privacy Act and the Access to Information Act reinforce this protection.

 

 

IC 78-18R6 – Registered Retirement Income Funds – March 6, 2002.

Introduction

1. If you are the carrier of a retirement income fund (RIF), this circular will help you administer the fund. It explains certain provisions of the Income Tax Act (the Act) and outlines the registration requirements of the Canada Revenue Agency (CRA).

2. Section 146.3 of the Act contains the provisions governing registered retirement income funds (RRIFs).

3. Subsection 146.3(1) defines a RIF as an arrangement between a carrier (see 4 below) and an annuitant under which the carrier agrees to make payments to the annuitant and, if the annuitant chooses (“elects”), to the annuitant’s spouse or common-law partner after the annuitant’s death, in consideration for the transfer of property to the carrier. The payments must begin no later than the first calendar year after the year in which the annuitant entered into the RIF. Each year, the carrier must make one or more payments that, in total, are at least equal to the minimum amount (see 5 below) under the RIF for the year. A payment cannot be greater than the value of the property held in connection with the RIF immediately before the payment.

4. An arrangement can be entered into with a person or organization listed below, who is referred to as the carrier:

(a) a company licensed to carry on an annuities business in Canada (such as an insurance company);

(b) a Canadian trust company;

(c) a company that the Governor in Council has approved to sell investment contracts for registered retirement savings plans (RRSPs); and

(d) a depositary described in section 146 as:

(i) a member or a person eligible to become a member of the Canadian Payments Association (CPA); or

(ii) a credit union that is a shareholder or member of a corporate body referred to as a “central” for the purposes of the Canadian Payments Association Act.

Minimum amount

5. The “minimum amount” referred to in 3 above is nil for the year in which the annuitant enters into the fund. For each subsequent year, starting in 1998, you calculate the minimum amount by multiplying the fair market value of the property (other than certain types of annuities) held in connection with the fund at the beginning of the year by a prescribed factor, and adding the result to the total, if any, of all amounts representing either:

  • a periodic payment received by the trust in the year under an annuity, the fair market value of which is not included in the calculation of the minimum amount; or
  • an estimate of a periodic payment the trust would have received under such an annuity held at the start of the year, if the trust had not disposed of the right to the payment during the year.

The prescribed factor can correspond to the age of the first annuitant under the fund or, if the first annuitant so elects before receiving any payments under the fund, to the age of the annuitant’s spouse or common-law partner at that time. Section 7308 of the Income Tax Regulations describes the prescribed factor.

6. For certain qualifying RRIFs, the prescribed factor corresponding to the age of an individual who is over 70 and under 78 differs from the prescribed factor for other RRIFs and will result in a minimum amount that is slightly lower than that for other RRIFs. A RRIF is a qualifying RRIF if the annuitant entered into it before 1993 and the carrier has not accepted any property after 1992, other than property transferred from another qualifying RRIF.

7. The prescribed factor for a qualifying RRIF is the factor in the following table that corresponds to the age in whole years (in the table referred to as “X”) of the individual at the beginning of the year, or the age the individual would have been at the beginning of the year if the individual had been alive then.

Age (X) Factor Age (X) Factor
under 79 1/(90 – X) 87 .1133
79 .0853 88 .1196
80 .0875 89 .1271
81 .0899 90 .1362
82 .0927 91 .1473
83 .0958 92 .1612
84 .0993 93 .1792
85 .1033 94 or older .2     
86 .1079    

8. The prescribed factor for all other RRIFs is the factor in the following table that corresponds to the age in whole years (in the table referred to as “Y”) of the individual at the beginning of the year, or the age the individual would have been at the beginning of the year if the individual had been alive then.

Age (Y) Factor Age (Y) Factor
under 71 1/(90 – Y) 83 .0958
71 .0738 84 .0993
72 .0748 85 .1033
73 .0759 86 .1079
74 .0771 87 .1133
75 .0785 88 .1196
76 .0799 89 .1271
77 .0815 90 .1362
78 .0833 91 .1473
79 .0853 92 .1612
80 .0875 93 .1792
81 .0899 94 or older .2     
82 .0927    

9. RRIF payments can start in the year the annuitant enters into the arrangement, but any such payment made in that year exceeds the minimum amount and is subject to withholding taxes. Amounts exceeding the minimum amount can be transferred to another fund or plan or to purchase an annuity (see 43 to 48 and 50 to 51).

10. The elections noted in 3 and 5 above are independent of each other. The annuitant can elect to use the prescribed factor corresponding to the age of the spouse or common-law partner to calculate the minimum amount even if the spouse or common-law partner is not designated to continue to receive payments under the RRIF after the annuitant’s death.

11. As noted in 5 above, before any payments are made under the fund, the annuitant has to elect to use the prescribed factor corresponding to the age of the spouse or common-law partner when calculating the minimum amount. Once the election is made, it cannot be changed, even if the spouse or common-law partner dies. However, the annuitant can establish another RRIF by transferring funds and then make a new election for this other RRIF.

12. There are no timing restrictions on the election noted in 3 above, under which benefits can be paid to the spouse or common-law partner on the death of the annuitant. The election can be made under a provision of the deceased annuitant’s will. When the annuitant has made an election, the surviving spouse or common-law partner becomes the annuitant under the fund after the death of the first annuitant. The surviving spouse or common-law partner can also become the annuitant even if the first annuitant did not make an election – provided you undertake to make payments to the surviving spouse or common-law partner, and the legal representative for the deceased annuitant consents. As well, a new spouse or common-law partner of the surviving spouse or common-law partner can become the annuitant under the fund on the death of the surviving spouse or common-law partner – provided you undertake to make payments to the new spouse or common-law partner, and the legal representative of the now-deceased surviving spouse or common-law partner consents. See the T4RSP and T4RIF Guide or information sheet RC4178, Death of a RRIF Annuitant, for information on reporting requirements on the death of an annuitant or surviving spouse or common-law partner.

Approval of a Specimen Fund:
 
13. You should get our approval of the arrangement before marketing it as a RIF.  The RIF contract and application form together constitute the specimen fund.  Submit a draft copy of the specimen fund to the following address:

Registered Plans Directorate
Canada Revenue Agency
3rd floor
45 Sacre-Coeur Boulevard
Hull QC  K1A 0L5

Note
If a locked-in addendum or supplementary agreement is used with the specimen fund to accommodate the transfer-in of locked-in pension funds, send a copy of the addendum or supplementary agreement with your specimen fund. (See 21 to 26 for more information on locked-in funds.)

14. When we are satisfied that the specimen fund meets the requirements of the Act, we will notify you that we will accept for registration as a RRIF an actual arrangement entered into in the approved form. We will ask you to send us a final, printed copy of the approved arrangement and application form.

15. When we accept the specimen fund, we will assign an identification number to it. In any correspondence with us, include the identification number when you refer to the specimen fund or to a RRIF conforming to the specimen fund. When you refer to a RRIF, also use the annuitant’s social insurance number and the contract number (for example, a contract, account, certificate, or other identifying number you have assigned to the arrangement) under which the fund is or will be registered.

Registration

16.  To register RIFs, send us a list of the names of individuals with whom you have entered into aarrangements.  you need to provide the name, address, and SIN of each individual, and the contract numbers (for example, the contract, account, certificate, or other identifying number you have assigned to each arrangement) of the arrangements on the list. We will not register the RIF, regardless of the circumstances, if the annuitant’s social insurance number is missing from the list. You also need to include the name of the specimen fund, the identification number we assigned to the specimen fund, and the calendar year in which you entered into the listed arrangements.

You can submit lists on a quarterly or more frequent basis but you need to submit at least one each year, not later than 60 days after the end of the calendar year for which you want registration. Send each list attached to a separate Form T550, Application for Registration of Retirment Savings Plans, Education Saving Plans and Retirment Income Funds, or attached to a separate letter for each specimen fund with the signature of an authorized officer of the carrier who:

  • states the total number of arrangements listed for the specimen fund, noting the identification number we assigned to the fund and the number of pages that make up the list; and
  • affirms that:
    • the annuitants of the funds listed have asked to have their funds registered;
    • the arrangements listed comply with the provisions of section 146.3 of the Act; and
    • the funds conform in all respects to the approved specimen fund.

Please do not submit lists as an attachment to Form T3G, Certification of No Tax Liability by a Group of RRSPs, RRIFs, or RESPs. Lists attached to Form T3G will not be accepted for registration.

Send the list, in ASCII or on CD-ROM, to:

Registered Plans Directorate
Canada Revenue Agency
45 Sacre-Coeur Boulevard, 3rd Floor.
Hull QC  K1A 0L5

17. The list should contain only funds that have not previously been registered. If you need to correct the information on a list already submitted, such as a SIN or name, send us a separate letter.

18. Do not list an arrangement for registration until you have received property transferred to it, since a fund does not meet the definition of a RIF unless a transfer of property has been completed.

Statutory Conditions for Registration

19. The text of the arrangement has to comply with subsection 146.3(2) by including the following provisions:

(a) The carrier will make only those payments described in paragraphs 146.3(2)(d), 146.3(2)(e), and 146.3(14)(b), and in the definition of “retirement income fund” in subsection 146.3(1).

(b) Any such payments cannot be assigned in whole or in part.

(c) When the carrier is a person referred to as a depositary in section 146:

(i) the carrier has no right of offset regarding the property held in connection with the fund (see 20 below) for any debt or obligation owing to the carrier; and

(ii) the property held in connection with the fund cannot be pledged, assigned, or in any way alienated as security for a loan or for any purpose other than that of the carrier making payments to the annuitant as described in (a) above.

(d) Except when the annuitant’s spouse or common-law partner becomes the annuitant under the fund, the carrier will, if the annuitant dies, distribute the property held in connection with the fund (see 20 below) at the time of the annuitant’s death or an amount equal to the value of such property at that time.

(e) At the direction of the annuitant, the carrier will transfer (as described in 45) all or part of the property held in connection with the fund (see 20 below), or an amount equal to its value at the time of the direction [other than property required to be retained according to the provision described in paragraph 146.3(2)(e.1) or (e.2)], together with all information necessary for the continuance of the fund, to a person who has agreed to be a carrier of another RRIF of the annuitant.

(e.1) When an annuitant of a fund that does not govern a trust, or of a fund that governs a trust created before 1998 that does not hold an annuity contract as qualified investment for the trust, at any time directs that the carrier transfer all or part of the property held in connection with the fund (see 20 below), or an amount equal to its value at that time, to any person who has agreed to be a carrier of another RRIF of the annuitant, as described in (e) above, the transferor shall retain an amount at least equal to (i) or (ii) below, whichever is less:

(i) the fair market value of a portion of the property, if its fair market value does not decline after the transfer, that would ensure the minimum amount under the fund for the year in which the transfer is made can be paid to the annuitant in the year; or

(ii) the fair market value of all the property.

(e.2) When an annuitant under a fund not covered under (e.1) above at any time directs that the carrier transfer all or part of the property held in connection with the fund (see 20 below), or an amount equal to its value at that time, to any person who has agreed to be a carrier of another RRIF of the annuitant, as described in (e) above, the transferor shall retain property in the fund sufficient to ensure that the total of:

(i) the fair market value, immediately after the transfer, of a property that is:

(A) property other than an annuity contract; or

(B) a commutable annuity contract; and

(ii) all amounts representing a reasonable estimate, as of the time of the transfer, of the amount of an annual or more frequent non-commutable annuity contract that the trust may receive after the transfer and in the year of the transfer

is not less than the amount, if any, by which the minimum amount for the annuitant for the year exceeds what has already been paid to the annuitant for the year.

(f) The carrier will not accept property as consideration, other than property transferred from:

(i) a registered retirement savings plan (RRSP) under which the individual is the annuitant;

(ii) another RRIF under which the individual is the annuitant;

(iii) the individual, to the extent only that the amount of the consideration was an amount described in paragraph 60(l)(v) of the Act;

(iv) a RRIF or RRSP of the annuitant’s spouse or common-law partner or former spouse or common-law partner under a decree, order, or judgment of a competent tribunal or under a written separation agreement, relating to a division of property between the individual and the individual’s spouse or common-law partner or former spouse or common-law partner in settlement of rights arising out of or on the breakdown of their marriage or common-law partnership (see 49);

(v) a registered pension plan of which the individual is a member [within the meaning assigned by subsection 147.1(1)];

(vi) a registered pension plan in accordance with subsection 147.3(5) or (7); or

(vii) a provincial pension plan in circumstances to which subsection 146(21) applies.

(g) No benefit or loan that is conditional in any way on the existence of the fund can be extended to the annuitant or to a person with whom the annuitant was not dealing at arm’s length, other than:

(i) a benefit that is required to be included in computing the annuitant’s income;

(ii) an amount referred to in paragraph 146.3(5)(a) or (b); or

(iii) the benefit derived from the provision of administrative or investment services in respect of the fund.

(h) The fund in all other respects must comply with regulations of the Governor in Council made on the recommendation of the Minister of Finance. 

20. The term “property held in connection with the fund” as used in this circular means the value of property held by the carrier for the fund, and the value of earnings from that property, that are relevant in determining the amount payable to the annuitant under the fund.

Locked-in pension funds

21. Provincial pension standards legislation and the federal Pension Benefits Standards Act, 1985 restrict the cash-out of pension benefits in an effort to ensure that members of a pension plan have an income for life. In most pension jurisdictions, members who have reached a specified age or number of years of service can only cash out their benefits on termination of employment or at retirement if they transfer the funds to an acceptable arrangement. These funds are referred to as “locked-in.”

The transfer options vary by jurisdiction. Generally, locked-in pension funds can be transferred from a pension plan to one or more of the following:

  • another pension plan;
  • a person, for the purchase of a life annuity;
  • a locked-in RRSP or locked-in retirement account (LIRA);
  • a locked-in RRIF (LRIF); or
  • a life income fund (LIF).

22. A LIRA is an arrangement that meets both the locking-in requirements under pension standards legislation and the requirements in the Act for RRSPs.

23. An LRIF and a LIF are arrangements that meet both the locked-in requirements under pension standards legislation and the requirements in the Act for RRIFs. The restrictions imposed by the standards legislation can be included in the RRIF document itself, or in an endorsement or addendum attached to the RRIF document.

24. An LRIF pays out at least the minimum amount required by the Act each year but restricts the total payments in a year to a maximum set by pension standards legislation.

25. A LIF is similar to an LRIF in that it pays out at least the minimum amount each year but does not exceed a maximum set by pension standards legislation. Some provincial regulations now provide that when the annuitant reaches 80 years of age, the minimum amount for the year can be paid from the LIF and the remaining funds can be used to purchase a life annuity. The annuity has to meet the conditions in the relevant pension standards legislation and in clause 60(l)(ii)(A) of the Act (see 51). The annuity can be purchased before the annuitant reaches 80 years of age.

26. The Act only allows transfers from a RRIF to another RRIF, to an RRSP, or to a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada for the purchase of an annuity described in clause 60(l)(ii)(A). Consequently, funds first have to be transferred from an LRIF or LIF to an RRSP (or LIRA) before they can be transferred to a registered pension plan. See 43 to 51 for more information on transfers.

Agency Agreement

27. You may have an arrangement with an agent, such as an investment broker, that allows the agent to provide you with certain administrative and investment functions. You do not need to submit the agency agreement with the specimen fund. The agent may be appointed as custodian of the securities, and if the securities are registered in the agent’s name, then the existence of the agency agreement, the identity of the trustee, and the contract number of the RRIF that governs the trust should be clearly disclosed in the security registration form.

28. The specimen fund has to state that the ultimate responsibility for administering each fund remains with you as the carrier. The agent may not change the approved specimen fund. You have to deal directly with the CRA concerning all RIF matters and reporting requirements, unless we have your written authorization to deal with your agent or other representative.

Group Arrangements

29. An association, employer, or other organization (hereafter referred to as an “organization”) can sponsor a group RIF. A group RIF is essentially a collection of individual RRIFs for associated individuals, such as employees of an employer, members of an association, or the spouses or common-law partners of such individuals. The organization can act as agent for the annuitant for certain purposes, such as making investment selections under the fund. When this occurs, the text of the RIF arrangement and its application form should clearly show that the annuitant has authorized the organization to act as his or her agent and for what purpose.

30. When the organization acts as agent for the annuitant, the text of the RIF arrangement has to state that the ultimate responsibility for administering each fund remains with you as the carrier. The organization may not change the approved specimen fund. You have to deal directly with the CRA concerning all RIF matters and reporting requirements, unless we have your written authorization to deal with another person.

Application Form

31. The application form that is part of the specimen fund (see 13) has to request the following information:

(a) annuitant’s name, address, SIN, and date of birth;

(b) annuitant’s signature;

(c) contract number (for example, the contract, account, certificate, or other identifying number you have assigned to the arrangement); and

(d) carrier’s name.

32. The application form must contain a request by the annuitant for you, as the carrier, to apply for registration of the fund as a RRIF under section 146.3 of the Act. If an organization (see 29 and 30) sponsors the specimen fund, the application form has to include a clause in which the annuitant authorizes the sponsor to act as the annuitant’s agent.

33. We recommend that you include an area on the application form for the applicant to make either or both elections referred to in the definitions of RIF and minimum amount in subsection 146.3(1). (See, respectively, 3 and 5.)

34. You cannot use the word “registered” to refer to the name of the fund in the application form or other specimen fund documents, since the specimen fund is not registered. Only the individual arrangements entered into in the approved form are registered.

Amendments or revisions

35. Send all amendments or revisions to an approved specimen fund to us, at the address in 13, for our approval before the amendments are put into effect. Your submission should specify the nature of the changes.

36. If the specimen fund is amended to accommodate the transfer-in of locked-in pension funds, send us a copy of the locked-in addendum or supplementary agreement. (See 21 to 26 for more information on locked-in funds.)

Change of carrier

37. The terms of your RIF arrangement may allow you to resign as carrier and to appoint a successor carrier. This is generally considered to be an amendment to the specimen fund. To process the change, we need a letter from you telling us about the change of carrier and the effective date. We also need confirmation from you or from the successor carrier that each annuitant who has a contract conforming to the specimen fund has been informed of the change. The successor carrier should send any amendments to the specimen fund resulting from the change to us at the address in 13 for our approval.

Termination of the specimen fund

38. Let us know when you are no longer marketing a specimen fund by writing to us at the address in 13. Also let us know when there are no longer any outstanding RRIFs that conform to the specimen fund.

Issuing receipts

39. You should issue a receipt for property that you receive for a RRIF under paragraph 60(l). This includes:

  • funds directly transferred from a matured RRSP (commutation payment under an RRSP annuity); and
  • amounts paid to a qualified beneficiary as a refund of premiums from an unmatured RRSP or as a designated benefit from another RRIF (only a spouse, common-law partner, or financially dependent child or grandchild can be a qualified beneficiary).

The issuer of an annuity should also give the annuitant a receipt when an excess payment from a RRIF is used to purchase an annuity under paragraph 60(l). (See 50 and 51)

40. The document you issue as a receipt should clearly indicate that it refers to a RRIF or an annuity purchased with the single payment from the RRIF, and should instruct the annuitant to attach it to his or her personal income tax return. The document should be no wider than 21.5 centimetres (the width of an income tax return) and should record the following:

(a) name of the RRIF carrier or issuer of the annuity;

(b) signature of an authorized official;

(c) contract or arrangement number;

(d) annuitant’s name, address, and SIN;

(e) total amount of funds received; and

(f) date payment received.

If you issue receipts in duplicate, clearly identify the copy and suggest that the annuitant keep it for his or her personal records.

41. Regarding 40(b), you can issue receipts that bear a facsimile signature of an authorized official, without countersigning or initialling, if the receipts are serially numbered and a copy is retained at your head office, or, for an annuity purchase, at the head office of the issuer of the annuity.

42. For more information on when to issue receipts, see Appendix F of the T4RSP and T4RIF Guide. It also provides information on reporting and deducting amounts paid, or considered to be paid, from a RRIF. You can get a copy of the guide at any CRA tax services office or on our Web site.

Transfer of funds from a RRIF to another RRIF or RRSP

43. If a RRIF annuitant wishes to transfer property from that RRIF to another retirement income fund for the same annuitant or to a retirement savings plan for the same annuitant, you and the annuitant must first ensure that the fund or plan to which the transfer is to be made is registered, or that it will qualify for registration.

44. If you transfer the RRIF property to a new specimen fund, whether it is one of your specimen funds or a specimen fund of another carrier, the annuitant must ask you or the other carrier to apply for registration of the fund (see 32). If the transfer is to an RSP, the annuitant must ask the issuer to apply for registration of the plan as outlined in the current version of Information Circular, IC72-22, RRSP (above in this post).

45. A RRIF annuitant can use Form T2033, Direct Transfer Under Paragraph 146(16)(a) or 146.3(2)(e), or any other method, to request a direct transfer of all or part of the property of the RRIF exceeding the minimum amount to another RRIF. The annuitant does not have to include the transferred amount in income.

46. A RRIF annuitant can use Form T2030, Direct Transfer Under Paragraph 60(l)(v), or any other method, to request a direct transfer of the payment exceeding the minimum amount to an RRSP. The carrier of the RRIF must report the excess payment transferred and the minimum amount paid to the annuitant on the T4RIF slip. The issuer of the RRSP should issue a tax receipt for the excess payment received.

47. You do not need to use Form T2033 if you are the carrier of both RRIFs, or Form T2030 if you are the carrier of the RRIF and the issuer of the RRSP, if all the information that otherwise would be supplied on either of these forms is recorded under the receiving fund or plan.

48. Do not deduct income tax from funds properly transferred. You have to retain sufficient funds before transfer to make the minimum amount payment for that year [see 19(e) to (e.2)].  

Transfer between RRIFs or RRIF to RRSP on marriage or common-law partnership breakdown

49. Form T2220, Transfer from an RRSP or a RRIF to Another RRSP or RRIF on Marriage Breakdown, is used to request a transfer of property under a written separation agreement or under a decree, order, or judgment of a competent tribunal relating to a division of property on breakdown of a marriage or common-law partnership. A RRIF annuitant can use this form to request a transfer of property from a RRIF to a RRIF or RRSP under which the annuitant’s spouse or common-law partner or former spouse or common-law partner is the annuitant. See the T4RSP and T4RIF Guide for more information on completing the transfer.

Purchase of an annuity

50. A RRIF annuitant can use Form T2030, Direct Transfer Under Paragraph 60(l)(v), to request a direct transfer of a payment exceeding the minimum amount of the RRIF to a person licensed or otherwise authorized under the laws of Canada or a province to carry on an annuities business in Canada for the purchase of an annuity for the annuitant. You must report the minimum amount for the year and the transferred payment on a T4RIF slip. The issuer of the annuity should issue a receipt (see 39) showing the date and amount of the single payment used to purchase the annuity.

51. The annuity that is purchased can be for the life of the annuitant or for the lives jointly of the annuitant and the annuitant’s spouse or common-law partner, with or without a guaranteed term. The guaranteed term cannot be more than 90 years minus:

(a) the annuitant’s age at the time of purchase; or

(b) the age of the annuitant’s spouse or common-law partner at the time of purchase.

The annuity can also be a fixed-term annuity with a term equal to 90 years minus:

(a) the annuitant’s age at the time of purchase; or

(b) the age of the annuitant’s spouse or common-law partner at the time of purchase.

The annuity has to begin making payments no later than a year after it is purchased. The annuity cannot provide for any payments except:

(a) annual or more frequent periodic payments that are equal to each other or unequal only because of adjustments described in subparagraphs 146(3)(b)(iii) to (v); and

(b) payments in full or partial commutation of the annuity and, when the commutation is partial, annual or more frequent periodic payments after the commutation that are equal to each other or unequal only because of adjustments described in subparagraphs 146(3)(b)(iii) to (v).

Taxation of a trust

52. A trust governed by a RRIF is exempt from taxation except in the following situations:

(a) A trust governed by a RRIF is taxable on all its taxable income for a tax year if:

(i) the trust was governed by a fund that became an “amended fund” as referred to in subsection 146.3(11);

(ii) the trust borrowed money during the tax year or the trust borrowed money in a previous tax year that was not repaid before the beginning of the year; or

(iii) the trust received a gift of property (other than a transfer from an RRSP or RRIF under which the individual is the annuitant) in the year or in a previous tax year and did not divest itself of the property, or any property substituted for it, before the beginning of the year.

(b) When the last annuitant under a RRIF dies and all the funds are not paid out of the trust in the year of death, the trust is taxable on its taxable income for each year after the year following the year of death. This applies to the 1993 and subsequent tax years. Before 1993, the trust was taxable on its taxable income for each year after the year of death of the last annuitant.

(c) When a trust governed by a RRIF has carried on any business in a tax year and (a) above does not apply, the trust is taxable on its business income for the year – that is, its income for the year computed without reference to incomes or losses from sources other than the business. For 1993 and subsequent tax years, the trust is not taxable on any business income attributable to its income from, or from the disposition of, qualified investments (see 56) for the trust.

(d) When a trust governed by a RRIF has acquired a property that is not a qualified investment, the trust is subject to tax on its taxable income calculated on the assumption that:

(i) it only had income (including dividends described in section 83 of the Act) from non-qualified investments; and

(ii) the taxable capital gains and allowable capital losses equalled the capital gains and capital losses, respectively, from the dispositions of only non-qualified investments.

(e) A trust governed by a RRIF is liable for taxes, calculated at the end of each month, which are generally equal to 1% of:

(i) the amount by which the trust’s cost amount of investments in foreign property (excluding foreign property that also constitutes a non-qualified investment) exceeds the allowable portion; and

(ii) the fair market values, at the time of acquisition, of non-qualified investments held at month-end (excluding the fair market value of property that was included in the annuitant’s income under subsection 146.3(7) – see 56 below).

(f) When, after April 25, 1995, a trust governed by a RRIF enters into an agreement (otherwise than as a result of acquiring or writing an option listed on a prescribed stock exchange) to acquire a share of the capital stock of a corporation (otherwise than from the corporation) at a price that may differ from the fair market value of the share at the time the share may be acquired, the trust is subject to tax during any month it is party to the agreement. The tax payable is equal to the amount of dividends paid on the share at a time in the month that the trust is a party to the agreement minus the amount of the dividends received by the trust.

Any tax payable by a trust under (e) and (f) above, although calculated monthly, is payable with the annual return that has to be filed on behalf of the trust.

Trust income tax returns

53. A trust company acting as trustee of a trust governed at any time in the year by a RRIF has to complete Form T3IND, T3IND Income Tax Return for RRSP, RRIF, or RESP, unless the trust company has properly satisfied this filing requirement by filing Form T3G, Certification of No Tax Liability by a Group of RRSPs, RRIFs, or RESPs. It has to file the return no later than 90 days after the end of the year.

Taxation of the annuitant – Change in fund after registration

54. If the fund is revised or amended, or a new fund is substituted for it, after registration, with the result that the fund fails to comply with the requirements of section 146.3, the RRIF will no longer be considered to be a RRIF. The fund is deemed to be an amended fund and, consequently, the annuitant has to include the fair market value of the property of the fund as of the day of change in income for the year in which the fund becomes amended.

Taxation of the annuitant – Acquisition and disposition of non-qualified investments

55. Qualified investments for a trust governed by a RRIF are defined under subsection 146.3(1) and section 4900 of the Income Tax Regulations.

56. When a RRIF trust acquires property that was not a qualified investment when acquired, or uses or permits a property of the trust to be used as security for a loan, the annuitant under the fund at that time has to include in income for that tax year the fair market value of the property that was not a qualified investment, or the fair market value of the property used as a security. Subparagraph 52(e)(ii) identifies taxes payable by a RRIF trust that has one or more investments that were qualified investments when acquired but became non-qualified, and 52(d) above discusses taxes payable by a RRIF trust on the income from a non-qualified investment.

57. When the trust disposes of property that was not a qualified investment when acquired, the annuitant can deduct from income in the year of disposition the amount that was included in income at the time of acquisition, or the proceeds of disposition, whichever is less. When an annuitant has added to income the fair market value of trust property used as security for a loan, the annuitant can deduct that fair market value (less the net loss, excluding interest payments, incurred because of the use as security) from income in the year in which the property ceases to be used as security.

58. As explained in Interpretation Bulletin IT-408R, Life Insurance Policies as Investments of Registered Retirement Savings Plans and Deferred Profit Sharing Plans, the provisions of section 146 concerning the acquisition of non-qualified investments may not always apply when an RRSP trust acquires an interest in or pays amounts under a life insurance policy. The same is not true for a RRIF trust. The provisions of section 146.3 concerning the acquisition of non-qualified investments by a RRIF trust will always apply when the RRIF trust acquires an interest in, or pays an amount under, a life insurance policy.

Taxation of the annuitant – Purchase or sale of property for inadequate consideration

59. If a RRIF trust acquires property for a consideration greater than the fair market value of the property at the time of acquisition, or disposes of property for a consideration less than the fair market value at that time or for no consideration, the annuitant of the RRIF at that time must include twice the difference between the fair market value and the consideration, if any, in calculating his or her income for the tax year.

Additional information

60. You can find more information in the current version of the following publications, which are available at any CRA tax services office or on our Web site.

T4040 RRSPs and Other Registered Plans for Retirement Guide

T4079 T4RSP and T4RIF Guide

RC4178 Death of a RRIF Annuitant

IC 78-14 Guidelines for Trust Companies and Other Persons Responsible for Filing T3IND, T3G, T3D, T3P, T3S, T3RI, and T3F Returns

IT-412 Foreign Property of Registered Plans

IT-528 Transfers of Funds Between Registered Plans

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…

The two certainties in life… Death and Taxes.

This post is a brief look at estate filing rewuirements with the Canada Revenue Agency (CRA) and the role and requirements of an executor in Canada.

In Canada, there is no estate or succession tax, unless you consider the taxes owing to the CRA on the estate at death.  RC4111(E) for English is what I used to do my research on this area, which can be tricky if you have no experience dealing with Estates, or with the CRA; http://www.cra-arc.gc.ca/E/pub/tg/rc4111/rc4111-e.html.

Here is what makes it complicated… Your loved one dies and there is money left in the estate and by money, I’m referring to bank accounts, some investments and maybe an asset owned in the name of the deceased, like a car, or even a house.  Before you, or the person responsible (the executor) can begin removing things from the deceased’s name into someone else’s name – usually yours – they have to first go to the CRA and find out if the deceased owed any taxes. 

Aside from information already on their systems, the CRA will know if there are taxes owing by the deceased based on what has already been filed.  But what about stuff not filed yet?  One way the CRA determines if there are any taxes owing is by having the executor complete the filing of all tax returns owing for the deceased within 60-90 days of their date of death.  Then, if there is no amount owing, the CRA provides a certificate called a clearance certificate which the executor can then present to banks, etc along with the death certificate in order to move funds and investments over to the surviving member.

If a clearance certificate is not received and funds are disbursed and the estate owes taxes, the CRA can then hold the executor liable for those funds!

The returns the CRA will be looking for include a T1 (individual tax return) for the decreased covering the period from January 1st of the year of death up to the date of death, reporting all income from employment and investments.  Report income earned after the date of death on a T3 Trust Income Tax and Information Return.  A T3 reports income from trusts for the estate (all the assets of the deceased make up the estate).

The capital gains (profit on any item bought) on their investments also have to be accounted for an added on this return.

If you file the final return late and there is a balance owing, the CRA will charge a late filing penalty (LFP).  They will also charge interest on both the balance owing and any penalty. The penalty is 5% of any balance owing, plus 1% of the balance owing for each full month that the return is late, to a maximum of 12 months – as of January 2012.  The LFP may be higher if the CRA has charged a LFP on a return for any of the three previous years.

In certain situations, the CRA may cancel the penalty and interest if you file the return late because of circumstances beyond your control.  If this happens, complete Form RC4288, Request for Taxpayer Relief, or include a letter with the return explaining why you filed the return late. For more information, go to Fairness and Taxpayer Bill of Rights or see IC07-1, Taxpayer Relief Provisions.

Here is the 2011 CRA guide for preparing returns for deceased people;

http://www.cra-arc.gc.ca/E/pub/tg/t4011/t4011-e.html

Ever wondered what a holding company is for the purposes of taxation? Wonder no longer! Read on…

A holding company is a company whose sole purpose is to hold shares in another company.  It does not produce goods or perform services.  

If a holding company owns a majority of shares in that company, it becomes the parent company.

The reasons for establishing holding companies are diverse;

They may be created to operate for a short period of time or as part of a long-term plan. Factors to consider include the nature and revenue of the business, the jurisdiction in which the business owner resides, and the business owner’s long term goals.

Advantages:  Minimizing risks and exposure, a holding company can protect an owner’s interests by keeping creditors at a distance while removing cash from an exposed operating company to a holding company on a tax-free basis.  

In this scenario, owners can take risks through the operating company while limiting the risk to that company and not exposing the holding company because the holding company performs no transactions and therefore does not move cash and other assets around.  The holding company is exposed to risk to the extent of its investment in the operating company.  So if a holding company lends money to the operating company, it can secure the debt and become a secured creditor (A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor) of the holding company giving the holding company priority when it is time for the debt to be repaid (especially in bankruptcy).

Tax Benefits:  Corporate – Depending on the percentage of outstanding shares held by the holding company in the operating company, the dividends paid to the holding company may be tax-free.  Individual – For shareholders with a high marginal tax rate, a portion of tax on dividends from taxable Canadian companies may be deferred until dividends are paid by the holding company to the shareholders.  You may be able to locate the holding company in a province with a lower corporate tax rate. 

Estate Planning:  Holding Companies may help with succession planning by facilitating the transfer of wealth to the next generation.  Shares in an operating company can be transferred to younger family members through a holding company by way of an estate freeze, structured to cap a person’s tax liability upon his or her death and transfer any future growth to family members.

Disadvantages:  Set-up costs.  Holding companies require additional set-up costs and these expenses can be ongoing, including the cost of preparing annual financial statements and corporate tax returns.  If the number of shares is significant, then this is not so much of a concern. 

No tax benefits or negative tax implications.  As losses realized in a corporation are only available to offset other income earned by the corporation.  Holding companies are also not eligible for the $750,000.00 capital gains deduction. 

Double taxation may exist if personal tax is required to be paid as well as corporate taxes levied on the income earned by the holding company.  To avoid the negative tax consequences associated with the payment of funds from a holding company to a shareholder, include the repayment of shareholder loans and taxable dividends (which may result in a refund of corporate tax to the holding company).

Director’s Liability:  Many moons ago when I worked for the CRA, I came across many holding companies set up in order to protect directors from being responsible for unremitted source deductions, unremitted HST (PST and GST)corporate taxes and they also used passive directors  – usually not involved in day-to-day operations of the business – but they are all still liabile for any debts incurred by the corporation.  Passive directors should of course be aware of what the corporation is doing and should ensure that they are providing due diligence or have director’s liability insurance in place to protect them.

 

How Brilliant is the Internal Revenue Service?

How brilliant is the IRS? Really? I am 100% serious.

These guys just rolled out something that the taxation industry has long been in need of and after going through it, I give it top marks for creativity, originality and for the final product.

You see, the IRS unveiled a website called “Understanding Taxes” and it contains some great educational content, including detailed lesson plans, interactive activities, simulations, and more!

The site is broken into resources for educators, and for students. So if you’re teaching tax, you can grab resources to assist, including lesson plans with links to the applicable national and state standards, which makes it really easy to integrate Understanding Taxes into an existing classroom curricula, or to teach to your tax staff. The intention is for this material to be presented to high school or community college classrooms with the assumption being that once you get into higher levels of education, those with an interest are taking courses in taxation, finance and accounting.

The Understanding Taxes Student Site provides high schools, community colleges, and the general public with a technology-based instructional tool aimed at raising the awareness of the IRS’ policies, practices and general taxation education. It’s a win-win and I cannot wait for the CRA to do the same.

In the meantime, happy reading.

The link to the site is below;

http://www.irs.gov/app/understandingTaxes/index.jsp

New CRA Non-Resident Forms starting January 1st, 2012.

Well, look how time flies!

The new CRA Non-resident treaty-rate requirements take effect on January 1st, 2012.

Non-residents of Canada who are eligible for benefits under a tax treaty entered into between Canada and another country will now have to complete a declaration or provide equivalent information to avail themselves of any reduced rate of tax or exemption provided under the relevant tax treaty instead of relying on their domicile.

The Canada Revenue Agency (CRA) recently released three declaration forms to be used by non-residents of Canada for this purpose, namely;

Form NR301 – Declaration of eligibility for benefits under a tax treaty for a non-resident taxpayer.
http://www.cra-arc.gc.ca/E/pbg/tf/nr301/nr301-10e.pdf

Form NR302 – Declaration of eligibility for benefits under a tax treaty for a partnership with non-resident partners
http://www.cra-arc.gc.ca/E/pbg/tf/nr302/nr302-10e.pdf

Form NR303 – Declaration of eligibility for benefits under a tax treaty for a hybrid entity.
http://www.cra-arc.gc.ca/E/pbg/tf/nr303/nr303-10e.pdf

What information is the CRA now looking for?

Non-residents of Canada must disclose on these forms the following information:
(i) Legal name of non-resident
(ii) Mailing address of non-resident
(iii) Confirmation of type of non-resident (i.e., individual, corporation or trust)
(iv) Foreign and Canadian tax identification numbers if any
(v) Country of residence for treaty purposes
(vi) Type of income for which the non-resident is eligible for treaty benefits (e.g., interest, dividends, royalties, trust income, income from business carried on in Canada or gains from disposition of taxable Canadian property).

Where does the form go?

The non-resident must immediately notify the payer of any such income, or partnership or hybrid entity through which the income is derived, so they can be given the treaty rate.

Does this form expire?

Yes, These forms expire on the earlier of any change in the non-resident’s eligibility for treaty benefits or three years from the end of the calendar year in which this form is signed and dated.

What onus is now on the payor?

For its part, a Canadian resident payer is instructed NOT to apply a reduced Canadian withholding tax rate under Part XIII where:
(i) The non-resident has not provided the Form or equivalent information and such payer is not sure if the reduced rate applies,
(ii) The Form is not complete
(iii) A tax treaty is not in effect between Canada and the non-resident’s country of residence; or
(iv) Such payer has reason to believe that the information provided in the non-resident’s declaration is incorrect of misleading.

Who is liable?

If the non-resident does not complete the form and the treaty rate is given, the payor is held liable by the CRA for the difference between the treaty rate and the non-treaty rate, so usually 10%.

Big changes!

How are you preparing for them?