Tuesday, January 27, 2009

2009 Federal Budget Proposal For RRSP and RRIF Loss Carrybacks

Today's federal budget contains a proposal to allow decreases in the value of Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) after the annuitant's death, but before the funds are distributed to the beneficiaries, to be carried back and deducted against the inclusion of the RRSPs or RRIFs in the deceased annuitant's income in the year of death.

According to the Annex 5, Tax Measures: Supplementary Information and Notices of Ways and Means Motions:

The fair market value of investments held in a Registered Retirement Savings Plan (RRSP) at the time of an RRSP annuitant’s death is generally included in the income of the deceased for the year of death. A subsequent increase in the value of the RRSP investments is generally included in the income of the beneficiaries of the RRSP upon distribution. Similar rules apply in the case of Registered Retirement Income Funds (RRIFs).

There is, however, no existing income tax provision to recognize a decrease in the value of RRSP or RRIF investments that occurs after the annuitant’s death and before they are distributed to beneficiaries.

Budget 2009 proposes to allow, upon the final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of post-death decreases in value of the RRSP or RRIF to be carried back and deducted against the year-of-death RRSP/RRIF income inclusion. The amount that may be carried back will generally be calculated as the difference between the amount in respect of the RRSP or RRIF included in the income of the annuitant as a result of the death of the annuitant and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant.

This measure will apply in respect of deceased annuitants’ RRSPs or RRIFs where the final distribution from the RRSP or RRIF occurs after 2008.

In the last year, I have seen quite a few estates in which the value of RRSPs and RRIFs have declined along with the stock markets. This is a fair proposal, but has not as yet been passed.

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