The 2009 federal budget is proposing to allow losses incurred in a RRSP or a RRIF in the time between the death of the annuitant and the final distribution of the assets in the registered plans to be carried back and deducted against the year-of-death inclusion of the plans in the income of the deceased.

The proposed change appears to alleviate a perceived inequity in the Income Tax Act, which, in effect, penalized beneficiaries for losses while the registered plans of deceased annuitants were held up pending ultimate distribution.

“We’re delighted with this change as it was long overdue,” says Jamie Golombek, chairman of the tax working group of the Investment Funds Institute of Canada, which specifically recommended the change in its pre-budget submission. Golombek is also managing director of tax and estate planning with CIBC Private Wealth Management. Both organizations are based in Toronto.

The fair market value of investments held in a registered retirement savings plan at the time of an annuitant’s death is generally included in the deceased’s income in the year of death. A subsequent increase in the value of investments in the RRSP (or RRIF) is generally included in the income of the beneficiaries of the registered plan upon distribution.

Until this proposed change, however, there was no 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.

For example, under the existing rules, an RRSP (or RRIF) that held investments valued at $100,000 at the time of the annuitant’s death would be included in the annuitant’s final tax return as $100,000 income, and taxes would be due on that amount. If, while the registered plan was held up pending distribution, the value of the investments fell to, say, $60,000, the beneficiaries had no ability to regain any of the taxes paid on the $40,000 loss.

The proposed measure will apply to deceased annuitants’ RRSPs or RRIFs when the final distribution from the RRSP or RRIF occurs after 2008.

IE