New RRIFs to get a break from Ottawa
Proposal to change controversial foreign content rule on the table.
The Federal Department of Finance has quietly tabled draft proposals that would end what has been a nasty surprise for thousands of people converting their RRSPs to RRIFs.
Under existing law, when the conversion takes place the assets in an RRSP are deemed to pass into the RRIF at fair market value – not book value.
This may seem like an exercise in semantics, except that the result can be disruptive and possibly expensive. That’s because by valuing everything at the market price, the foreign content of a plan may be suddenly pushed over the current 25% limit, even though no changes have been made in the actual holdings.
If that happens, the Canada Customs and Revenue Agency (CCRA) imposes a penalty of 1% a month on the excess, until it is eliminated.
Within an RRSP, assets are always calculated at book value (the original purchase price) for purposes of determining allowable foreign content. So even if the foreign holdings in a plan increase in value at a much faster rate than the domestic securities, it doesn’t matter.
However, when market value is applied on convsion to a RRIF, that’s when problems can develop. Effectively, all the values in the RRIF are reset to current market prices.
It appears that this result was never really the intent of the government – it all comes down to some ambiguous legal drafting. Now the Finance Department is moving to fix things, but the changes are buried so deep within new proposed legislation dealing with the tax consequences of emigrating from Canada that they are almost impossible to find.
However, they are really there, and are expected to be included in a bill to be presented to Parliament later this year. If passed, the changes will mean that all assets pass between trusts at book value, as long as certain basic conditions are met. The new rules will be retroactive to December, 1998.