2015-0567071E5 RRIF Conversion to Life Annuity

Principal Issues: Explain the rules surrounding RRIF conversion to life annuity.

Position: Wording of the Act.

Reasons: See below.

Author: Tsang, Peky
Section: 146(3)

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                                                                                                                                                                      2015-056707      
                                                                                                                                                                      P. Tsang

May 26, 2015

Dear XXXXXXXXXX:

Re: File #2014-056326 – RRIF Conversion to a Life Annuity

This letter is in reply to your correspondence of January 15, 2015, wherein you had follow-up questions to our letter dated January 6, 2015 regarding registered retirement income fund (RRIF) conversions to a life annuity.

In particular, you asked whether there are additional guidelines to qualify for the “offsetting deduction” on the conversion of your RRIF to a life annuity and for a formula in calculating the “offsetting deduction”. You also would like to know how the payments from the life annuity will be taxed and whether there are particular credits/exemptions that may be applicable. Finally, you asked for clarification of subparagraphs 146(3)(b)(iii) to (v) of the Income Tax Act.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in information circular (IC)70-6R6, Advance Income Tax Rulings and Technical Interpretations.

As noted in our previous correspondence to you, dated January 6, 2015, Form T2030, Direct Transfer under Subparagraph 60(l)(v) is to be used by a RRIF annuitant to request a direct transfer of a payment in excess of the RRIF minimum amount to purchase an annuity. Guidelines for completing the Form T2030 can be found on our website: http://www.cra-arc.gc.ca/E/pbg/tf/t2030/README.html. The financial institution(s) involved in the conversion of your RRIF should be able to assist you with the details of this form.

In general, the amount of the “offsetting deduction” is equal to the amount included in your income for the year in excess of the year’s minimum amount. You will be issued a receipt by your annuity issuer indicating the “offsetting deduction”. The receipt will need to be attached to your income tax and benefit return for the year of the transfer.

Any amount subsequently received out of or under the life annuity is included in your income. Generally, you may claim the non-refundable pension credit on such income if you are 65 years of age.

Finally, the life annuity must provide for equal annual or more frequent periodic payments, subject to adjustments allowed under subparagraphs 146(3)(b)(iii) to (v) of the Act. In general, these adjustments reflect changes due to Canadian market interest rates, the Consumer Price Index as published by Statistics Canada, etc. Where there is a partial commutation of the life annuity, the remaining periodic payments must be uniformly reduced with allowance for the permissible adjustments under the Act. A partial commutation of the life annuity is a lump sum payment in substitution for receiving a lesser amount per periodic payment.

Should you have further questions, please contact the officer in charge of your file, Ms. Peky Tsang at (905) 721-5224.

We trust that our comments will be of assistance to you.

Yours truly,

Lita Krantz, CPA, CA
for Director
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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