NEW ANTI – AVOIDANCE MEASURES

By: pooja kapoor


Bill C – 13, which came into force effective March 1,2011, announced the strengthening of anti – avoidance rules to help prevent “aggressive” tax planning strategies, including those that purport to enable RRSP annuitants to access their RRSP funds without including these amounts in income. The bill introduced new anti – avoidance rules for RRSPs and RRIFs similar to the rules provide for a special tax on certain tax “advantages” that unduly exploit the tax attributes of an RRSP/RRIF on prohibited investment and on non – qualified investments.

An advantage may generally be described as a benefit obtained from a transaction that is intended to unduly exploit the tax attributes of an RRSP/RRIF, which could include a reduction in the value of an RRSP/RRIF without a corresponding income inclusion. For example, benefits derived from transactions that would not have occurred in a regular, open market between arm’s length parties would be caught, as would payments to an RRSP made on account or in lieu of payments for services. This could include: dividends paid by a corporate client of an individual on a special class of shares held by the individual’s RRSP, in lieu of the individual receiving remuneration for services provided to the corporation and investment income where the income is tied to the existence of another investment, for example, the offering of two type of securities in tandem, where one is held inside an RRSP and one outside. An advantage also includes certain other transactions such s benefits from “swap transactions”.

“Prohibited” and “non – Qualified investments” are targeted also. A prohibited investment generally includes debt of the RRSP/RRIF annuitant and investments in entities in which the annuitant or a non – arm’s length person has a significant interest (generally 10 % or more) or with which the annuitant does not deal at arm’s length. A special tax equal to 50% of the fair market value of the investment will apply to an annuitant on annuitant on acquisition of a prohibited investment by his/her RRSP/RRIF (or at the time that an investment becomes prohibited). A non – qualified investment is property that is not a qualified investment as described in the Income Tax Act and the Income Tax Regulations (see the list above). RRSPs/RRIFs that hold non- qualified investments will be subject to a special tax of 50% of the fair market value of the non – qualified investment.

In light of the above, consult your tax advisor before engaging in any RRSP/RRIF planning that might be seen by the Canada Revenue Agency as being “unduly aggressive”.

FOREIGN INVESTMENTS

Restrictions on foreign content of deferred income plans have been eliminated. RRSPs and other deferred income plans are permitted to invest in any kind of qualified investment without regard to whether it is foreign property, provided it meets the other qualifications of a “qualified investment”. Described above.

PENSION ADJUSTMENT (PA)

A taxpayer’s PA is meant to reflect the amounts of benefits accruing to a taxpayer under employer – sponsored RPPs and DPSPs of which the taxpayer is a member. For DPSPs, the PA is basically the amount of employer contributions to the DPSP. For money purchase RPPs, the PA reflects the sum of the employee and employer contributions to that plan. For defined benefit RPPs, the PA reflects the amount of benefits accruing to the taxpayer in that year, according to the defined benefit formula in the plan. Basically, the Pa for defined benefit RPPs) is equal to nine times the benefit plan (thus the PA being nine times 2% of earnings minus $600) will use up most of the taxpayer’s RRSPs are directly limited by benefits accruing to the taxpayer under employer – sponsored retirement saving vehicles.

Rules provide for the reporting of Pas by all employers who sponsor RPPs or DPSPs. The CRA informs taxpayers of their RRSP deduction limit for a taxation year in their Notice of Assessment for the prior taxation year. This Notice of Assessment is sent to taxpayers each year once their tax return for the previous year has been filed. The taxpayer’s RRSP deduction limit is based on his/her earnings and Pas from the prior year, so the CRA has all this information by the time the notice of assessment is prepared. For example, a taxpayer’s RRSP deduction limit in 2015 depends on his/her PA and earnings for 2014. The employer must report the 2014 Pas by the end of February 2015 on the taxpayer’s T4. in turn, the CRA will include the RRSP deduction limit for 2015, which is based on 2014 earnings and Pas, in the taxpayer’s Notice of Assessment for 2014, which is usually delivered to the taxpayer within four to six weeks after the receipt of his/her income tax return.

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