Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether the RCA advantage tax would apply if a specified beneficiary of an RCA were to assign their rights to receive distributions from the RCA to secure a personal loan or other debt, with concurrence of the RCA custodian.
Position: Yes.
Reasons: The assignment constitutes an advantage on the basis that it is a benefit conditional on the existence of the RCA. The exception for arm’s length loans does not apply. The advantage is the benefit derived from the security (i.e., the more favourable loan terms), not the loan itself.
September 16, 2016
Michael Chun HEADQUARTERS
ATP Projects Section Income Tax Rulings
International, Large Business Directorate
and Investigations Branch D. Wurtele
2013-050058
RCA advantage tax rules
We are writing to provide you with our views on a situation we considered involving retirement compensation arrangements (RCAs).
At issue was whether the advantage tax in section 207.62 of the Income Tax Act (the “Act”) applies where a specified beneficiary of an RCA assigned their rights to receive distributions from the RCA in order to secure a personal loan. The beneficiary was required to make all payments of principal and interest under the loan. In the event of default, the RCA distributions were to be paid directly to lender. The RCA custodian was party to the assignment agreement.
The term “advantage” is defined in subsection 207.5(1) of the Act and includes any benefit, loan or indebtedness that is conditional in any way on the existence of the RCA. A loan or indebtedness the terms and conditions of which are terms and conditions that persons dealing at arm's length with each other would have entered into is one of several enumerated exceptions from this provision.
By providing security to the lender by way of an assignment of their right to receive distributions under the RCA, the beneficiary was able to obtain a loan on more favourable terms than would otherwise be the case. Taking into account that the RCA custodian was party to the assignment and the RCA permitted the beneficiary to assign their rights under the arrangement, the purpose of which is to provide an income to the beneficiary in retirement, the favourable loan terms represent a benefit to the beneficiary. Since the benefit is conditional on the existence of the RCA, the advantage tax rules apply.
Note the distinction between an advantage that is a benefit as compared to an advantage that is a debt. In the case of a benefit, the advantage tax under subsection 207.06(1) is equal to the fair market value of the benefit; whereas in the case of a debt, the advantage tax is equal to the amount of the debt. In the situation at hand, the advantage is the benefit derived from the security (that is, the favourable loan terms), not the loan itself. Consequently, the advantage tax is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax.
Also note that the exception for arm’s length loans in subparagraph (a)(ii) of the definition does not apply since there is no reference to security in the exception. This is in contrast to the comparable “advantage” definition in subsection 207.01(1) of the Act that applies to RRSPs, RRIFs and TFSAs. That definition expressly refers to TFSAs being used as security for a loan, which reflects a clear policy to allow taxpayers to use their TFSA to secure a loan. This is not the case for RCAs, RRSPs and RRIFs.
This position is consistent with the position we took in 2012-047018, which considered a similar situation that contemplated an RCA being used to guarantee or secure a loan made to a specified beneficiary of the RCA in return for a fee paid to the RCA.
We trust our comments will be of assistance.
Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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