Section 207.01

An individual, who is an RRSP annuitant, borrows the “Mortgage Loan” from the RRSP, with a principal residence mortgage granted in favour of the RRSP as security. The Mortgage Loan would be administered by an approved lender under the National Housing Act and would be insured as required by Reg. 4900(1)(j.1) by an approved private insurer. The Mortgage Loan proceeds would be used to make an interest-free shareholder loan to a corporation controlled by the individual.

After indicating that the Mortgage Loan would be a qualified investment under Reg. 4900(1)(j.1)(d), and that “the granting of the Mortgage Loan would be a benefit conditional on the existence of the subject RRSP,” so that “there would be an advantage” unless the s. (a)(ii) exception applied, CRA stated:

[T]he terms and conditions of a mortgage loan that satisfies the requirements of paragraph 4900(1)(j.1)… would, because of the underlying nature of [the mortgage insurance] requirements, usually be terms and conditions that persons dealing at arm’s length with each other would have entered into; therefore, in such a case, the exception provided by subparagraph (a)(ii) of the definition “advantage” would likely be met. However…a benefit conditional on the existence of the subject RRSP (and therefore an advantage under paragraph (a) of the definition of “advantage”) could arise…if, for example, there is a default by the borrower and he/she is enriched as a result of the default.

An RRSP annuitant uses, for no consideration, property of a corporation of which the RRSP holds shares. Is this an advantage? CRA responded that, in these circumstances “the annuitant receives a benefit which is conditional on the existence of the RRSP trust as provided in paragraph (a) of the definition of advantage,” and that “as provided in paragraph 207.05(2)(a) … where the advantage is a benefit, the tax payable in respect of that benefit is the fair market value of the benefit.”

Would the transfer of an individual’s shares of a credit union to the individual’s RRIF, RRSP or TFSA ("registered plan") comes within the concept of advantage? After noting that a "swap transaction" includes, in respect of a registered plan, any transfer of property between the plan and its controlling individual, subject to specified exceptions, and that the concept of "advantage" in s. 207.01(1) “specifically states that any benefit that is an increase in the total fair market value of the property held in connection with the registered plan is considered a benefit if it is reasonable to consider, having regard to all the circumstances, that the increase is attributable, directly or indirectly, to a ‘swap transaction’," CRA stated:

Furthermore, the phrase directly or indirectly, used in the definition of advantage, includes (if that is the case) any immediate increase in the FMV of the registered plan resulting from the swap transaction, as well as any increase in the FMV of the registered plan that can be attributed to the initial swap transaction. For example, an advantage includes, among other things:

• any dividend, interest or other amount attributable to the property transferred,
• any increase in the value of the transferred property or the property that replaces the transferred property (whether or not the increase was realized),
• any income earned on the income.

Respecting a proposed swap of a savings bond held in an RRSP and a savings bond held in a non-registered account, before concluding that it was “subject to the concept of advantage either as a swap transaction or as an RRSP strip,” CRA stated, respecting the advantage definition:

Consequently, under the definition of advantage, any increase in the FMV of property held in an RRSP that is reasonably considered, in the circumstances, to be attributable, directly or indirectly, to a swap transaction is considered an advantage that is subject to tax. In that regard, the fact that the swap transaction is conducted at FMV is not relevant. The expression, directly or indirectly, used in the definition of advantage, includes (as applicable) any immediate increase in the FMV of the RRSP resulting from the swap transaction, as well as any increase in the FMV of the RRSP that it is possible to attribute to the initial swap transaction. For example, tax in respect of an advantage includes inter alia;

• any dividend, interest or other amount attributable to the swapped property,
• any increase in value of the swapped property or property that replaces the swapped property (regardless of whether or not the increase was realized),
• any income earned on income.

The tax respecting an advantage must be paid on an annual basis. It is therefore necessary to annually calculate the increase in the FMV of the RRSP resulting from an advantage.

The correspondent expressed concern that although the new rules effectively required an RRSP holding shares of a cooperative to dispose of some of those shares, the regulatory regime made it difficult or impossible for the cooperative to repurchase such shares. CRA stated:

By virtue of subsection 207.05(2), the tax payable is generally 100% of the FMV of the benefit. Thus, where an RRSP trust holds a prohibited investment, any income (determined without the dividend gross-up) or capital gain reasonably attributable, directly or indirectly, to the prohibited investment will be an advantage (as defined above). That advantage will be subject to that 100% tax. In general, any income earned or capital gain realized after March 22, 2011 that is attributable to cooperative shares that have been prohibited investments since the new rules came into force is subject to that tax. Any income earned and any realized capital gain attributable to shares acquired by an RRSP trust after March 22, 2011 is also subject to such tax if such shares are prohibited investments or non-qualified investments for the RRSP trust. Proposed subsections 207.01(6) and (7) particularly facilitate the calculation of the capital gain attributable to a prohibited investment by respectively providing for a deemed disposition and re-acquisition when a property becomes or ceases to be a prohibited investment, and a deemed cost at the end of March 22, 2011 for the calculation of the adjusted cost base of property that was a prohibited investment for an RRSP trust on March 23, 2011.

Tax under subsection 207.05(1) is a tax that must be paid annually on any income earned or capital gain realized in the year that is reasonably attributable, directly or indirectly, to property that is a prohibited investment. The annuitant of a RRSP trust subject to tax under subsection 207.05(1) could therefore, depending on the circumstances, wish that the RRSP trust dispose of all or part of the prohibited investment shares in order to no longer be subject to that tax. Again, a repurchase of shares by the cooperative is just one way that the RRSP trust can dispose of cooperative shares that have become excessive under the new rules.

In the course of a general discussion of the application of the prohibited investment rules to an RRSP that held shares of a cooperative on March 23, 2011, CRA stated:

The question of whether a property is a prohibited investment for an RRSP trust is applicable at all times. Although shares of a cooperative were qualified investments for a particular RRSP trust by virtue of the rules applicable at the time of the coming into force of the new rules, those shares could be prohibited investments for the RRSP trust on and after March 23, 2011, to the extent that they were not excluded properties. This would be the case if, at the time of the coming into force of the new rules, the annuitant held (taking into account the shares held directly by the annuitant, as well as those held by the RRSP trust and any person not dealing at arm's length with the annuitant) not less than 10% of the shares of a class of shares of that cooperative. All shares of the cooperative, to the extent that they are not excluded properties, would, as of March 23, 2011, be prohibited investments for the RRSP trust. Similarly, if, at a time after the new rules come into force, the annuitant, the annuitant’s RRSP trust or a person with whom the annuitant does not deal at arm's length acquires new shares, so that the annuitant now holds (taking into account the shares held directly, as well as those held in particular by the RRSP trust and any person not dealing at arm's length with the annuitant) not less than 10% of the shares of a class of shares of the cooperative, then all of such shares of the cooperative, to the extent that they are not excluded property, will therefore become prohibited investments for the RRSP trust. Shares of a cooperative may also become prohibited investments if they are not excluded property and at a time after the new rules come into force, other shareholders of the cooperative (holding shares of the same class as those held, directly or indirectly, by the particular annuitant) dispose of their shares, thereby increasing by at least 10% the percentage of such Shares held by the particular annuitant.

The annuitant of an RRSP or RRIF or the holder of a TFSA owns 2% of the shares (being common shares only) of a corporation and together with the trust owns no more than 10% of the shares, and the conditions in para. (c) (before turning to subpara. (iii)), are otherwise satisfied. The individual is one of five directors and thereby can cast 20% of the votes at a board meeting. There is no USA. CRA stated that the individual:

…has the right to cast at least 10% of the votes that could be cast regarding the governance of the corporation and, therefore, subparagraph (c)(iii) of the "excluded property" definition would not be satisfied.

Mr. X’s TFSA formed part of the residue of his estate which, as such, was bequeathed by the terms of his will to a spousal trust, with a lump sum capital payment of $100,000 per year to the beneficiary, Ms. X. Shortly after Mr. X's death, the executor liquidated the TFSA and transferred its value of $100,000, to the spousal trust. Subsequently, a payment of $100,000, representing the value of the TFSA, was made by the trustee to Ms. X prior to the end of the rollover period, by way of a distribution of capital from the spousal trust.

Does such payment from the TFSA to the surviving spouse by way of a capital distribution from the spousal trust satisfy para. (b) of the definition of "exempt contribution"? In responding, CRA first noted:

Given the words "directly or indirectly", a particular payment will qualify as a payment to the survivor whether the money is paid directly to the survivor under the TFSA or whether it is first paid to the executor of the estate and the trustee of the spousal trust before being paid by the latter to the survivor.

Since s. 248(8)(a) provided that a transfer, distribution or acquisition of property made under or as a consequence of the terms of a taxpayer’s will is to be considered to be a transfer etc. as a consequence of the taxpayer’s death, CRA was generally of the view that the payment was made as a consequence of the individual's death. CRA then stated:

Where amounts from a deceased holder's TFSA are first paid to the executor of the deceased holder's estate and then paid by the executor to the survivor, it is generally the CRA's view that the payment to the survivor is equal to the amounts paid out of the TFSA to the deceased holder's estate, to the extent that the survivor is entitled to the TFSA under the deceased holder's will, and the survivor receives an equivalent or greater amount from the estate as a consequence of the death of the deceased owner.

The same reasoning applies where amounts from the TFSA are paid by the executor of the estate to a spousal trust before being paid to the surviving spouse. Thus, the fact that the will provides for the payment of the residue of the deceased holder's property, including the TFSA, to a spousal trust would not, in and of itself, preclude the surviving spouse from receiving a survivor payment within the meaning of paragraph (b) of the Definition, provided that the spousal trust pays the surviving spouse an equivalent or greater amount during the rollover period. A lump sum payment from such a trust is deemed to be made as a consequence of the death of the deceased holder for the purposes of the Definition, provided that such payment is made in accordance with the terms of the will.

Mr. X, who died on January 1, 2018, made a specific bequest of his TFSA to his surviving spouse (Ms. Y). However, the estate administration proceeded slowly, and it was not until after December 31, 2019, i.e., the rollover deadline in para. (a) of the s. 207.01(1) definition of “exempt contribution” (the “Definition”), that the executor liquidated the TFSA and paid the proceeds of $100,000 (also corresponding to the TFSA’s value on death) to Ms. Y.

Is Ms. Y permitted to make a contribution to her TFSA as an “exempt contribution” upon receipt of the funds? CRA responded:

[P]aragraph (a) of the Definition gives the Minister the discretion to extend the rollover period. In such a case, the rollover period so extended shall be relevant not only for the purposes of paragraph (a) but also for the purposes of paragraph (b). As a result, a survivor payment made after December 31 of the first calendar year that begins after the death of the TFSA holder could satisfy the conditions of paragraph (b) of the Definition, provided that the Ministerial discretion is exercised to extend the rollover period. Thus, in the situation described, Ms. Y could, after receiving the amounts paid by the executor, make a contribution to her own TFSA and designate it as an exempt contribution, if the Ministerial discretion is exercised in her favour to extend the rollover period.

Although Mr. X made a specific bequest of his TFSA to his adult daughter, she executed a written renunciation of the bequest (that CRA went on to find was deemed by s. 248(9) to result in a “disclaimer” or a “release or surrender” for purposes of s. 248(8)(b),) so that following the TFSA's liquidation by the executor, the proceeds were transferred to Ms. Y (the surviving spouse of Mr. X) as the residuary beneficiary. Ms. Y contributed then $100,000 to her own TFSA (within the “rollover period” as set out in para. (a) of the s. 207.01(1) definition of “exempt contribution.”)

Was Ms. Y permitted to designate her contribution as an “exempt contribution”?

CRA stated that “the principal question is whether the payment is made as a consequence of the individual's death” and, in addition to referencing the s. 248(8)(b) rule, noted that “paragraph 248(8)(a) provides, in particular, that a transfer … of property made … as a consequence of [the taxpayer’s] will is considered to be a transfer … made as a consequence of the death of the taxpayer.” CRA then stated that it was “generally of the view that the payment of $100,000 made by the executor to Ms. Y of the TFSA proceeds would be a payment made as a consequence of Mr. X's death by virtue of subsection 248(8).”

Situation 1

Mr. X made a specific bequest of his TFSA to his spouse (Ms. Y), which had declined in value from $100,000 to $90,000 between death and its liquidation and transfer to Ms. Y, who contributed $100,000 to her TFSA. The residue was transferred to the surviving daughter.

Situation 2

Same as Situation 1 except that Ms. Y also received the residue of $200,000.

Situation 3

Same as Situation 1 except that the executor immediately liquidated the TFSA for $100,000 and invested it. Ultimately, $290,000 was distributed to Ms. Y.

Situation 4

Same as Situation 2 except that executor immediately transferred the TFSA property to an estate investment account, with such property diminishing in value to $90,000 before the proceeds of it and the residue of $200,000 were distributed to Ms. Y.

In Situations 1 and 2, were the survivor payments and "exempt contributions," as defined in s. 207.01(1) (the "Definition") $90,000 and $100,000, respectively – and what about Situations 3 and 4?

After indicating that “a particular payment may qualify as a survivor payment, whether the money is paid directly to the survivor under the TFSA or first paid to the executor before it is paid by the executor to the survivor” and also referencing s. 248(8)(a), CRA stated:

Thus, where amounts from a deceased holder's TFSA are first paid to the executor of the estate before being paid by the executor to the survivor … the survivor payment is equal to amounts paid under the TFSA to the estate of the deceased holder, to the extent that the survivor is entitled to a TFSA by virtue of the will of the deceased holder … and the survivor receives an equivalent or higher amount from the estate as a result of the death of the deceased holder.

Accordingly, in Situations 1 and 2, the limit would be $90,000 and $100,000 in Situations 3 and 4.

Would the transfer of a TFSA to the deceased's spouse as a total or partial payment of a debt owed to the spouse under the partition of the family patrimony, the dissolution of a matrimonial regime, a gift made by marriage contract, a post-mortem obligation to provide support or a spousal compensatory allowance comply with para. (b) of the definition of "exempt contribution"? Where the executors satisfied a legacy of a specific property (e.g., a residence) through the transfer of the property held in the TFSA (i.e., property other than the specific property that was the subject of the legacy), would that payment satisfy para. (b)?

After referencing the requirement for the payment to be made during the rollover period, CRA paraphrased s. 248(23.1)(a), and stated:

Consequently… the transfer or distribution of property held in the TFSA by the executors to the surviving spouse as a total or partial payment of the rights referred to in paragraph 248(23.1)(a) could constitute a survivor payment that is indirectly derived from an arrangement that ceased to be a TFSA because of the death of its last holder and is made as a consequence of the death of the individual as required under paragraph (b) of the Definition.

CRA also indicated, similarly to 2016-0679751E5 F, that, in light inter alia of s. 248(8)(a), a payment could be considered to be made to a surviving spouse directly or indirectly out of the former TFSA as a consequence of the deceased’s death where an executor in his discretion chooses to satisfy a legacy of specific property (in this case, of the residue of the estate, which included the family residence) by retaining the proceeds from the sale of the residence and instead paying an equivalent amount out of TFSA property.

Would a transfer of funds from a deceased holder's TFSA to the holder's surviving spouse in order to pay a specific legacy satisfy para. (b) of the definition for "exempt contribution," even though under the will the executor has the discretion as to which estate property will be used to satisfy the specific legacies? CRA responded:

Taking into account the words "directly or indirectly", a particular payment may qualify as a survivor payment [as defined in para. (b) of “exempt contribution”] whether the money is paid directly to the survivor under the arrangement or it is first paid to the executor of an estate before being paid by the executor to the survivor.

After referencing s. 248(8)(a), CRA stated:

The fact that the will provides for legacy of a sum of money to the surviving spouse rather than specifically providing a legacy of all or part of the TFSA would not in itself prevent the payment from being a survivor's payment for the purposes of the definition of "exempt contribution," to the extent that the executor has the authority under the will to satisfy the legacy out of the money that was held under the TFSA.

Mr. X, who died on January 1, 2018, had made a specific bequest of his TFSA (valued at death at $100,000) to his spouse (Ms. Y), who contributed the same amount to her TFSA on June 15, 2019. However, the executors did not liquidate the TFSA and pay the proceeds of $100,000 to her until after this contribution date (but before the December 31, 2019 rollover deadline provided in para. (a) of the s. 207.01(1) definition of “exempt contribution"). Did her contribution qualify as an exempt contribution?

After indicating that the “exempt contribution” definition did not “require that the survivor payment be received before the contribution is paid,” CRA noted that the definition “requires that the contribution be designated in prescribed form (Form RC240), within 30 days after the day on which the contribution is made (or at any later time that is acceptable to the Minister).”

Accordingly:

In the event that Ms. Y receives a survivor payment more than 30 days after making her contribution but within the rollover period, she may request the exercise of Ministerial discretion … . Only if the Minister accepts the filing of Form RC240 at a time after the expiry of the 30-day period may Ms. Y's contribution qualify as an excluded contribution.