The 50% tax on prohibited investments applies to investments acquired after March 22, 2011. The 50% tax also applies to pre-March 23, 2011 investments that first become prohibited after October 4, 2011. The transfer of a pre-March 23, 2011 prohibited investment between RRSPs or RRIFs of the same annuitant will not be treated as a post-March 22, 2011 acquisition and thus will not result in the investment being subject to the 50% tax.
If, in a calendar year, an RRSP or RRIF trust acquires property that was a prohibited investment or if previously acquired property becomes prohibited, a tax is imposed on the annuitant of an RRSP or a RRIF.
The tax is equal to 50% of the fair market value (FMV) of the property at the time it was acquired or it became prohibited.
If the prohibited investment ceases to be a prohibited investment while it is held by the trust, the trust is considered to have disposed of and immediately re-acquired the property at its FMV.
The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.
The annuitant is also liable for the 100% advantage tax on income earned and capital gains realized on prohibited investments.
The 100% advantage tax applies to income earned, and the portion of any realized capital gain that accrued, after March 22, 2011, regardless of when the prohibited investment generating the income or gain was acquired. Transitional relief is available for prohibited investments held on March 23, 2011. For more information, see Transitional relief.
If an investment is both a non-qualified investment and a prohibited investment, it is treated as a prohibited investment only.
An annuitant subject to this tax is required to file Form RC339, Individual Return for Certain Taxes for RRSPs or RRIFs for Tax Year 2011. The return must be filed no later than June 30 of the following year. Any tax owing must also be paid by that date. For payment remittance options, see Make a payment.
The Department of Finance has advised that it is recommending that the June 30, 2012 deadline to file a Form RC341, Election on Transitional Prohibited Investment Benefit for RRSPs or RRIFs, be extended to March 1, 2013.
If you determine that a particular non-qualified investment held by your RRSP or RRIF trust is also a prohibited investment for the trust, contact your plan issuer/carrier.