2 August 2011 External T.I. 2011-0413291E5 - Swap transactions in RRSPs and RRIFs

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: Does the 2011 federal budget extend the TFSA prohibition on swap transactions to RRSPs and RRIFs?

Position: Yes

Reasons: The budget proposes to adopt the existing TFSA rules for swap transactions. These rules eliminate all current and future benefits associated with swap transactions, regardless of whether the transaction occurs at fair market value. This serves, in effect, as a prohibition on swap transactions. Position is consistent with statement in Department of Finance News Release dated October 16, 2009, which first introduced prohibition on swap transactions for TFSAs.

XXXXXXXXXX 							2011-041329
								D. Wurtele
August 2, 2011

Dear XXXXXXXXXX :

Re: Prohibition on swap transactions in RRSPs and RRIFs - 2011 federal budget

This is in reply to your email of July 6, 2011 in which you asked for clarification on the recent budget proposal relating to swap transactions in registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. We are, however, prepared to provide the following general comments.

The 2011 federal budget, as updated on June 6, 2011, introduced a number of new anti-avoidance rules for RRSPs and RRIFs that are largely based on anti-avoidance rules that currently apply to tax-free savings accounts (TFSAs). Of relevance to your query, the existing rules that effectively prohibit swap transactions between TFSAs and other accounts will be extended to RRSPs and RRIFs, with effect from July 1, 2011. Swap transactions that are undertaken to remove an investment that would otherwise give rise to adverse tax consequences under the other budget proposals will be permitted until the end of 2012.

Legislation to implement the budget proposals has not yet been introduced before Parliament, nor has any draft legislation been released by the Department of Finance for public comment. Consequently, the remainder of our comments are generally limited to a discussion of the existing TFSA rules for swap transactions. As noted earlier, however, the budget proposes to adopt these rules for RRSPs and RRIFs without any material modifications.

Section 207.05 of Income Tax Act (the "Act") imposes a special tax if an advantage is provided to the holder of a TFSA, the TFSA itself or any other person not dealing at arm’s length with the holder. The tax is generally equal to the fair market value (FMV) of the advantage. The tax is payable by the holder of the TFSA, unless the advantage was extended by the issuer of the TFSA (or non-arm's length person), in which case the tax is payable by the issuer.

A swap transaction, which is defined as any transfer of property (other than a contribution or distribution) between the TFSA and the TFSA holder or non-arm's length person, is expressly included in the list of transactions that are treated as an advantage under these rules.

More specifically, an advantage is defined to include any increase in the total FMV of property held in connection with a TFSA that can reasonably be considered to be attributable, directly or indirectly, to a swap transaction. The fact that the initial swap transaction may have occurred at FMV is not relevant. This is because the words "directly or indirectly" in the advantage definition encompass, not only the increase in the FMV of the TFSA resulting from the swap transaction (if any), but also all future increases in FMV that are reasonably attributable to the initial swap transaction. Thus, for example, any dividends, interest or other amounts paid on the swapped security, any appreciation in value on the swapped security or on any substituted property (whether realized or not), and any income earned on income, would be subject to the advantage tax. As the advantage tax is required to be remitted annually, it would be necessary to determine the total increases in FMV annually.

Subsection 207.06(2) of the Act gives the Minister of National Revenue discretion to waive all or part of the advantage tax in appropriate circumstances.

We trust that these comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch