The Budget proposes several changes to the Registered Retirement Savings Plans and Registered Retirement Income Funds (both referred to herein as “RRSPs”) rules to address concerns regarding the use of RRSPs in certain tax planning strategies, including “RRSP strips.” RRSP strips, which may take various forms, are, according to the Budget documents, schemes which purport to enable RRSP annuitants to access their RRSP funds without including an appropriate amount in income.
The Budget proposals augment the existing RRSP anti-avoidance rules by introducing rules similar to some of the anti-avoidance rules that currently apply to Tax-Free Savings Accounts ("TFSAs"), namely:
- the "Advantage" rules – introduced to prevent the perceived abuse of the tax attributes of TFSAs. The proposed RRSP advantage rules will specifically include benefits from RRSP strips;
- the "Prohibited Investment" rules – the definition of "prohibited investments" for TFSAs will be adopted for RRSPs. TFSA prohibited investments include debt of the TFSA holder, investment in entities in which the TFSA holder (or non-arm's-length person) has a "significant interest" or with which the holder does not deal at arm's-length; and
- the Non-Qualified Investment rules – the current rules for non-qualifying investments of RRSPs will be modified to be consistent with the TFSA rules.
Subject to two exceptions, these new provisions will apply to transactions occurring, and investments acquired, after Budget Day. For this purpose, investment income generated after Budget Day on previously-acquired investments will be considered to be a “transaction occurring” after Budget Day. The exceptions to this effective date are:
- The RRSP advantage rules will not apply to "swap transactions" undertaken before July 2011. In addition, swap transactions undertaken to ensure that an RRSP complies with the new rules by removing an investment that would otherwise be considered a prohibited investment, or an investment which gives rise to an advantage under the new proposals, will be permitted until the end of 2012.
- In relation to income generated on prohibited investments, the portion of capital gains accruing after Budget Day will be considered investment income earned after Budget Day. However, the 50% tax will not apply to prohibited investments that were held on Budget Day by an RRSP if disposed of before 2013. If an investment which is described in the new definition “prohibited investment” was acquired before Budget Day and is still held in an RRSP after 2012, it will be deemed to be a prohibited investment acquired on January 1, 2013.