Guaranteed investment funds (GIFs) are what are known as "segregated funds" under section 138.1 of the
Income Tax Act (Canada). Their income is calculated separately from the Company's.
Taxation of non-registered contracts
Income Tax Act (Canada) requires fund income, capital gains and losses to be allocated to contract owners for tax purposes every year. The funds therefore have no taxable income and generally do not pay Canadian tax1.
The method of allocating income, capital gains and losses is not prescribed by the
Income Tax Act or the Canada Revenue Agency. Income can be allocated to a contract owner for a calendar year even if the owner made a total withdrawal from their contract before the end of that year.
1 However, a fund's foreign income may be subject to taxes in a foreign country.
Last April, we replaced the system used to administer Helios2, Helios, Millennia III and Imperial Growth Plan guaranteed investment fund contracts. The replacement led us to change the method used to allocate income, capital gains and losses.
The method that will now be used for Desjardins Insurance GIFs, and that is used by other insurers in the industry, is based on the number of units held at the end of each month for interest and dividend income, and the number of units held at the end of the year for capital gains and losses.
Interest and dividend income
The allocations of interest and dividend income are time-weighted based on the number of end of months the owner held the units during the year. Consequently, a contract owner who made a withdrawal during the year is generally allocated interest and dividend income even if they no longer hold units at year's end. Since allocated income increases the adjusted cost base (ACB) of units before the capital gain or loss related to the withdrawal of units is calculated, there is no double taxation.
Capital gains and losses
Capital gains and losses are allocated in 2 phases. The first phase involves allocating capital gains and losses to contract owners who made withdrawals and correspond to the gains or losses realized at the time of withdrawal. The second phase involves allocating the gains and losses remaining after the first phase to
all contract owners who hold units on December 31.
Interest, dividends and capital gains and losses will be included on T3 and Relevé 16 (Quebec) tax slips issued for the 2022 fiscal year (sent in early 2023).
Taxation of registered contracts (RRSP, LIRA, RRIF, LIF, TFSA)
The change in allocation method does not change the tax treatment of the contract income.
The "Taxation of Guaranteed Investment Funds" booklet, which explains in detail all tax aspects related to GIFs, is currently under review. We will let you know when it becomes available.