2015-0605491I7 In-kind transfer of property from an RRSP to an IPP

Principal Issues: Whether the in-kind transfer of property from an individual's RRSP to an individual pension plan, pursuant to paragraph 146(16)(a) of the Income Tax Act, can be considered a swap transaction or RRSP strip, and thus give rise to Part XI.01 advantage tax.

Position: No.

Reasons: The exceptions in paragraph (a) of the swap transaction definition and paragraph (c) of the RRSP strip definition will apply to such a transfer, with the result that the transfer is neither a swap transaction, nor an RRSP strip.

Author: Ward, Jason
Section: 207.01, 207.05

                                                                                                  September 1, 2015

    Registered Plans Directorate                                                HEADQUARTERS
    Andrew Donelle                                                                     Jason R. Ward, CPA, CA
    Director                                                                                  613-670-9035
    Compliance Division
    18th Floor, Tower B, Place de Ville
                                                                                                   2015-060549

    RE: In-kind transfer of property from an RRSP to an IPP

This letter is in response to your email of August 26, 2015 concerning the potential application of the advantage rules in Part XI.01 of the Income Tax Act (the “Act”) to an in-kind transfer of property from a taxpayer’s registered retirement savings plan (“RRSP”) to an individual pension plan (“IPP”).  In particular, you are seeking clarification on whether the transfer would constitute a “swap transaction” or an “RRSP strip”, as those terms are defined in subsection 207.01(1) of the Act.

For the purposes of our comments, we have assumed that the IPP is a registered pension plan and that the taxpayer does not deal at arm’s length with the IPP.  We have also assumed that the transfer is a tax-free transfer to which paragraph 146(16)(a) of the Act applies.  Unless otherwise noted, all references herein are references to the Act.

Our Comments

Under the advantage rules, any increase in the fair market value (“FMV”) of the property held in connection with an RRSP, registered retirement income fund (“RRIF”) or tax-free savings account (“TFSA”) that is attributable to a swap transaction will be an advantage, as defined in subsection 207.01(1), and give rise to the 100% advantage tax imposed under subsection 207.05(1).  An RRSP strip is also considered an advantage.

Swap Transaction

A swap transaction, as defined in subsection 207.01(1), is any transfer of property between a registered plan (i.e. RRSP, RRIF or TFSA) and the annuitant or holder of the registered plan or a non-arm's length person, subject to certain exceptions. Paragraph (a) of the definition stipulates that a swap transaction does not include a payment out of an RRSP in satisfaction of all or part of the RRSP annuitant’s interest in the plan.  In our view, the transfer from the taxpayer’s RRSP to the IPP represents such a payment and is thus not a swap transaction.

RRSP Strip

An RRSP strip is defined in subsection 207.01(1) as the amount of the reduction in the FMV of the property held in connection with an RRSP or RRIF if the value is reduced by way of a transaction or event (or series of transactions or events) in which one of the main purposes is to enable the annuitant (or a non-arm’s length individual) to obtain a benefit from the property held in the RRSP or RRIF.  The definition also specifies several exceptions including, most notably at paragraph (c), an amount that is described in subsection 146(16).

Consequently, while the in-kind transfer of property from the taxpayer’s RRSP to the IPP would otherwise likely fall within the definition, such a transfer is explicitly excluded from being an RRSP strip, and thus will not give rise to the 100% advantage tax.

Other Considerations

The advantage rules do not appear to have any application to the specific type of transfer that you raise in your letter (i.e. a transfer of property from an RRSP to an IPP in accordance with paragraph 146(16)(a)), but could conceivably apply in other situations where individuals effect transactions between their RRSP and an IPP.  The Income Tax Rulings Directorate would be happy to provide assistance in the future in the course of your review of any such transactions.

Finally, while there is no prohibition in the Act on making in-kind transfers of property from an RRSP to an IPP, such transfers raise additional concerns over whether the FMV of the property is computed using an appropriate valuation technique.  In particular, it will be important to ensure that the property is properly valued when determining the amount of an individual’s qualifying transfer to an IPP for the purposes of calculating their provisional PSPA under subsection 8304(10) of the Income Tax Regulations.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer 

We trust the above comments will be of assistance. 

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015