How are Guarantees and Top-ups taxed?
Segregated fund contracts may need to pay a Top-up to the investor or beneficiary upon the maturity of the contract or the death of the investor. This Top-up amount is the difference in value between the segregated fund’s market value and the investor’s Adjusted Asset Cost, after adjusting for withdrawals.
Example: If the investor purchased $10,000.00 of a segregated fund and on the contract’s 10-year maturity date the fund has a market value of $8,000.00, then the segregated fund issuer will be required to pay the investor a Top-up of $2,000.00.
If the segregated fund is held in a registered account,
- Death of investor with no beneficiary: Upon the investor’s death where no beneficiary is named, the Top-up funds are paid into the account and are not taxed, and it is included in the value of the registered account and taxed within the deceased’s estate. If the registered plan has designated a spouse as the beneficiary of the plan, then the plan can be rolled into the surviving spouse’s registered plan and no tax is payable until the spouse’s death.
- Death of investor with beneficiary: Upon the investor’s death where a segregated fund beneficiary is designated, then the benefit is paid to the beneficiaries and the entire amount will be reported on a T4RSP Income Tax information slip and will be taxed in the hands of the estate.
- Maturity of contract: At maturity, the actual Top-up payment is deposited to the registered account and is not taxable. Eventually, when funds are removed from the registered account, the Top-up payment will be taxed and included on a T4RSP/T4RIF Income Tax information slip.
If the segregated fund is held in a taxable account,
- Death: Upon death, the Top-up payment is taxable as a Capital Gain on a T3 Income Tax information slip to the registered fund owner
- Maturity: At the Maturity Date, the Top-up amount is reported as a Capital Gain on the T3 Income Tax information slip and will be taxed in the hands of the registered owner.
Capital loss: If the guarantee is for less than the investor’s original investment, then a Capital Loss may result from maturity or death. This can be used in the investor’s current or Estate Income Tax return.