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Federal Tax - RRSPs. Grenon v. Canada
In Grenon v. Canada (Fed CA, 2025) the Federal Court of Appeal reviews the law of trust RRSPs:(1) Taxation of RRSPs and their annuitants
[16] Where an RRSP is a trust, it is taxed as an individual: s. 104(2), paragraph (b) of the definition of "“retirement savings plan”", s. 146(1). However, an RRSP is exempt from Part I tax on its taxable income provided it holds only qualified investments, does not carry on a business and does not borrow money: ss. 146(4), (10.1), 149(1)(r).
[17] Together, the Income Tax Act and Regulations specify which properties are qualified investments for RRSPs: s. 146(1), Part XLIX of the Regulations. A unit of a "“mutual fund trust”" is a qualified investment: ITR 4900(1)(d).
[18] Where an RRSP owns property that is not a qualified investment—a "“non-qualified investment”" (NQI) (see definition, s. 146(1))—the RRSP is taxable under Part I of the Income Tax Act on any income derived from the NQI and on any capital gains it realizes from disposing of the NQI: s. 146(10.1). Moreover, the RRSP computes that income as if 100 percent of any capital gains were taxable capital gains and 100 percent of any capital losses were allowable capital losses: s. 146(10.1)(b)(ii).
[19] One of two other consequences may arise where an RRSP holds NQI.
[20] Where an RRSP acquires NQI, Part I of the Income Tax Act requires the annuitant to include in their income the fair market value of the NQI at the time it was acquired (acquisition date value): ss. 56(1)(h), 146(10). If the annuitant has done so, and the RRSP disposes of the NQI, the annuitant may deduct from income the lesser of the amount they previously included in income and the RRSP’s proceeds from disposing of the NQI: s. 146(6).
[21] Where an RRSP holds NQI at the end of any month, Part XI.1 of the Income Tax Act imposes a tax on the RRSP for that month equal to one percent of the NQI’s acquisition date value: s. 207.1(1)(a). However, Part XI.1 tax does not apply where the acquisition date value was included in the annuitant’s income by virtue of subsection 146(10).
[22] Thus, either the annuitant or the RRSP is taxable based on the acquisition date value of the NQI, but not both.
(2) Qualification as a "“mutual fund trust”"
[23] A trust qualifies as a mutual fund trust at a particular time only if it satisfies several conditions: s. 132(6). Regulation 4801 prescribes certain conditions that must be satisfied at the time a trust seeks to qualify as a mutual fund trust. I refer to Regulation 4801(a) as the "“distribution condition”" and Regulation 4801(b) as the "“minimum beneficiary condition”".
[24] The distribution condition may be satisfied in one of two ways:(i) there has been a lawful distribution of units of the trust to the public in circumstances in which a prospectus or similar document was not required to be filed (ITR 4801(a)(i)(A)); or
(ii) a class of units of the trust is qualified for distribution to the public (ITR 4801(a)(ii)).
For this purpose, "“qualified for distribution to the public”" is defined and requires a prospectus, registration statement or similar document to be filed with a regulatory authority, and where required, accepted for filing, and a lawful distribution of units to the public in accordance with that document: ITR 4803(2)(a). [25] The minimum beneficiary condition requires that, in respect of a class of units that meets the distribution condition, there are no fewer than 150 beneficiaries each of whom holds not less than a block of those units with an aggregate fair market value of not less than $500: ITR 4801(b). The number of units that constitutes a block of units depends on the value of a unit: definition of "“block of units”", ITR 4803(1).
(3) Tax filing obligations
[26] Under Part I of the Income Tax Act, a taxpayer must file a "“return of income”" in prescribed form unless an exception applies. The prescribed form for a trust is a T3 Trust Income Tax and Information Return (T3).
[27] Part XI.1 provides that "“a taxpayer to whom [that] Part applies”", including an RRSP, must file "“a return for the year under [that] Part in prescribed form and containing prescribed information”". In that return, the taxpayer must estimate the tax, if any, payable by it under Part XI.1: s. 207.2(1).
[28] Most trusts, including RRSPs, must also file an information return: ITR 204(1).
(4) Assessments and statute-barring
[29] When a taxpayer files a tax return, the Minister must review it and issue an assessment; the Minister may also issue an assessment if a taxpayer does not file a return: ss. 152(1), (7).
[30] The Minister may later decide to reassess a taxpayer. However, absent an applicable exception, the Minister cannot reassess a taxpayer for taxes for a particular taxation year after the normal reassessment period for that year expires. One exception is where a tax return includes a misrepresentation attributable to neglect, carelessness or wilful default: s. 152(4)(a)(i).
[31] The normal reassessment period for a taxation year commences when the Minister sends an original notice of assessment or notice that no tax is payable for that taxation year, whichever is earlier: s. 152(3.1). This process applies separately under each Part of the Income Tax Act imposing tax. Thus, a Part I assessment does not start the normal reassessment period for Part XI.1 purposes and vice versa.
[32] A taxpayer may choose not to file a tax return, particularly if they believe they have no tax liability. However, the taxpayer then accepts the risk that the normal reassessment period will not start unless the Minister issues an assessment or notice that no tax is payable despite not receiving a return.
[33] The normal reassessment period for a particular taxation year for a trust (including an RRSP) ends three years after the Minister sends the notice of assessment or notice that no tax is payable for that taxation year: s. 152(3.1)(b). . Enns v. Canada
In Enns v. Canada (Fed CA, 2025) the Federal Court of Appeal allowed an appeal from the Tax Court, here from a decision "that dismissed Marlene Enns’ appeal from the assessment issued under section 160 of the Income Tax Act" involving a taxpayer's transfer of "property to their spouse or common-law partner for consideration that is less than the fair market value of the property transferred" (improvident transfer).
Here the court notes that in Ontario, RRSPs devolve directly to a spouse and not through their estate:[22] It is an important aspect of this appeal that the RRSP was transferred directly to Marlene Enns and that it did not pass through Peter Enns’ estate. Whether an RRSP passes directly to a designated beneficiary (and does not pass through the estate of the deceased) is a question of law and, in particular, of the law of the appropriate province. If the RRSP were part of Peter Enns’ estate, the RRSP (together with whatever other assets were part of his estate) would have been available to satisfy Peter Enns’ debts (including his tax debt).
[23] The Ontario Court of Appeal confirmed, for Ontario, "“that RRSPs do not form part of the estate of the deceased but instead devolve directly to the designated beneficiary”" (Amherst Crane Rentals Ltd. v. Perring, (2004), 2004 CanLII 18104 (ON CA), 187 O.A.C. 336, at paragraphs 3 and 4). ....
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