3 November 2023 APFF Financial Strategies Roundtable

This page contains translations of the questions posed at the 3 November 2023 APFF Financial Strategies and Instruments Roundtable held in Quebec City and of the Income Tax Ruling Directorate’s provisional written answers (which were orally presented by Mélanie Beaulieu and Marie-Clause Routhier, together with comments by Jérome Bernèche of the Department of Finance). We use our own titles. Footnotes are incorporated in the main text of the answers.

The 2 November 2023 APFF Roundtable is provided on a separate page.

Q.1 - Change of use preceding FHSA withdrawal

Mr. X, a Quebec resident, signed on January 1, 2020 an offer to purchase a single-family home that he wished to rent. The offer to purchase stipulated that he would take possession on June 1, 2020. He therefore went to a notary to sign the deed of purchase on that date. He had never lived in the house as his principal place of residence, as it had always been rented to an unrelated third party since its acquisition and he had always lived with his parents.

On May 1, 2023, Mr. X, who met all the conditions for opening an FHSA, opened an FHSA account and made a contribution of $8,000.

His tenant informed him that he did not wish to renew his lease, so that Mr. X wished to move into his house permanently to make it his principal place of residence from November 1, 2023.

Pursuant to paragraph 45(1)(a) of the Income Tax Act,[1] given this change in use of the property, Mr. X will be deemed to have disposed of the house for its fair market value ("FMV") and to have immediately reacquired it at that value.

Mr. X wishes to make a withdrawal from his FHSA on November 15, 2023 and has therefore completed Form RC725 [2] in order to make a qualifying withdrawal from his TFSA.

Questions

In such a situation, would Mr. X meet all the conditions for the purposes of the definition of "qualifying withdrawal" set out in subsection 146.6(1) I.T.A. in order to make a qualifying withdrawal, i.e., a non-taxable withdrawal? In particular:

(a) Is the date of the change in use, which results in a deemed acquisition, the acquisition date for the purposes of paragraph (d) of the definition of "qualifying withdrawal" in subsection 146.6(1)?

(b) For the purposes of paragraph (c) of the definition of "qualifying withdrawal" in subsection 146.6(1), Mr. X entered into an agreement in writing (January 1, 2020) before the date of the withdrawal (November 15, 2023) to acquire the qualifying home before October 1 of the calendar year following the calendar year in which the amount was received (October 1, 2024). Does paragraph (c) of the definition of "qualifying withdrawal" in subsection 146.6(1) require a link with the deemed acquisition pursuant to paragraph 45(1)(a)?

CRA Response

An individual who is the holder of an FHSA, where the individual wishes to make a qualifying withdrawal from that account for the acquisition of a qualifying home, must ensure that the amount the individual will receive as a benefit satisfies the conditions described in the definition of "qualifying withdrawal" in subsection 146.6(1).

One of those conditions, set out in paragraph (d) of the definition of "qualifying withdrawal", is that the individual did not acquire the qualifying home more than 30 days before the particular time.

According to the facts described, Mr. X acquired a single-family home on June 1, 2020. On November 1, 2023, he moved into the house on a permanent basis to make it his principal place of residence. He wishes to withdraw from his FHSA on November 15, 2023.

Based on the facts described and pursuant to paragraph 45(1)(a), since Mr. X will cease to use the house to earn income and will commence to use it for personal purposes as a place of residence, he will be deemed to have disposed of the property for proceeds equal to its FMV at that time and immediately thereafter reacquire the property at a cost equal to that FMV.

As indicated in the preamble to subsection 45(1), however, these deemed disposition and deemed acquisition rules apply only to subdivision c of Division B of Part I of the Income Tax Act, i.e., the subdivision relating to "Taxable capital gains and allowable capital losses". The rules set out in subsection 45(1) are therefore not applicable in the context of section 146.6, which is found in Division G of Part I of the Income Tax Act, dealing with "Deferred and other special income arrangements", in a context unrelated to the realization of a capital gain or loss.

For the purposes of the definition of "qualifying withdrawal" in subsection 146.6(1), applied at the time of the withdrawal of an amount from the FHSA, i.e., on November 15, 2023, the only acquisition of the qualifying home that Mr. X had made occurred on June 1, 2020, i.e., more than 30 days before November 15, 2023. The condition set out in paragraph (d) of the definition is therefore not met. The change in use that he made of his house on November 1, 2023 does not constitute an acquisition for the purposes of section 146.6, despite the deeming rules set out in paragraph 45(1)(a), for the purposes of subdivision c of Division B of Part I of the Income Tax Act.

As to whether paragraph (c) of the definition of "qualifying withdrawal", relating to the existence of an agreement in writing for the acquisition of the qualifying home, should relate to the deemed acquisition of the home under paragraph 45(1)(a) or could relate to another acquisition, there is no need to answer this question since the change of use will not result in a deemed acquisition of the home for the purposes of section 146.6. In the context of the question as asked, there is only one acquisition, which occurred on June 1, 2020, and, in this case, the acquisition referred to in paragraph (c) of the definition can only relate to that acquisition.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 1, 2023-0976911C6 F - CELIAPP - Changement d'usage / FHSA - Change in use

Q.2 - FHSA withdrawal for home construction

Mr. X, a single Quebec resident, has never owned a qualifying home. He signed an offer to purchase a land lot on January 1, 2020, and the deed of purchase was signed with the notary on February 1, 2020.

On May 1, 2023, having met all the conditions for opening an FHSA, he opened an FHSA account and contributed $8,000. He will make a further contribution of $8,000 on January 1, 2024.

On February 1, 2024, Mr. X will sign a written agreement with a contractor to build a single-family home on his land. Under the terms of the agreement, the house will be habitable by Mr. X on September 1, 2024, and it is Mr. X's intention to begin living in it on that date.

Mr. X would like to withdraw all of his FHSA contribution on June 1, 2024, and will complete Form RC725 to do so.

Questions

(a) In such a situation, would Mr. X satisfy all the conditions for the purposes of the definition of "qualifying withdrawal" in subsection 146.6(1) in order to make a qualifying withdrawal, i.e., a non-taxable withdrawal, in particular the condition set out in paragraph (a) relating to the acquisition?

(b) If Mr. X does not sign any agreement with a contractor for the construction of the entire house, but rather builds the house himself, i.e., he will only entrust certain work to subcontractors who deal at arm's length with him (e.g., plumber, electrician, roofer, etc.) and will carry out part of the work himself, would paragraphs (a) and (c) of the definition of "eligible withdrawal" in subsection 146.6(1) be satisfied assuming that the house will be habitable on September 1, 2024?

CRA Response

An individual who is the holder of an FHSA, when the individual wishes to make a qualifying withdrawal from that account for the acquisition of a qualifying home, must ensure that the amount the individual will receive as a benefit meets the conditions described in the definition of "qualifying withdrawal" in subsection 146.6(1).

Those conditions can be summarized as follows:

• The withdrawal must be made as a result of the individual’s written request in prescribed form in which the individual sets out the location of a qualifying home that the individual has begun, or intends not later than one year after its acquisition by the individual to begin, using as a principal place of residence (paragraph (a)).
• The individual must be resident in Canada from the time of the withdrawal until the earlier of the acquisition of the qualifying home and the individual's death. In addition, the individual must not, during the four calendar years preceding the particular year in which the withdrawal is made, and the period of the particular year ending on the 31st day preceding the withdrawal, have occupied an owner-occupied home owned by the individual (paragraph b)).
• The individual must have (before the withdrawal) entered an agreement in writing for the acquisition or construction of the qualifying home before October 1 of the calendar year following the calendar year in which the amount is received (paragraph c)).
• The individual must not have acquired the qualifying home more than 30 days before the withdrawal was made (paragraph d)).

More specifically, paragraph (c) of the definition of "qualifying withdrawal" states that an individual may receive an amount that is a qualifying withdrawal from an FHSA if the individual proceeds with the construction of the qualifying home.

As previously stated for the construction of a qualifying home under the home buyers' plan ("HBP"), the CRA considers that the home is generally acquired by the individual when it becomes habitable.

Thus, in the situation described in Question 2(a), we are of the view that Mr. X could be in a position to satisfy all the conditions set out in the definition of "qualifying withdrawal" insofar as, in particular, his qualifying home should be habitable from September 1, 2024 and he intends to begin using it as his principal place of residence on that date.

With regard to the situation described in Question 2(b), our comments above are essentially equally relevant. However, in that case, it is indicated that Mr. X would not sign any agreement with a contractor for the construction of the entire home and would instead plan to do some of the construction work himself. It is also indicated that, before withdrawing an amount from his FHSA, he entered into written agreements with various subcontractors for the construction of his home. We consider that in such a situation, he could generally satisfy the conditions set out in the definition of "qualifying withdrawal", in particular to the extent that those written agreements show that sufficiently significant work was undertaken to complete the construction of the qualifying home before October 1 of the calendar year following that in which the amount withdrawn from the FHSA was received.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 2, 2023-0978631C6 F - CELIAPP - Autoconstruction d'une habitation - FHSA - Self-construction

Q.3 - FHSA withdrawal to acquire co-ownership interest

Bruno lives in Quebec and satisfies all the conditions for opening an FHSA. He opened an FHSA account on May 15, 2023, and contributed $8,000. He has never owned a home.

Bruno and two of his friends signed an offer to purchase on September 15, 2023, to buy a duplex in equal shares. Only Bruno will live in one of the two units in the duplex as his principal place of residence, whereas the other unit will be rented out.

The offer to purchase stipulated that the date of possession of the duplex will be December 10, 2023.

On November 1, 2023, Bruno completed Form RC725 to make a qualifying withdrawal from his FHSA. He wanted to withdraw his entire FHSA. He went to his financial institution and gave them the form to process the withdrawal. The withdrawal was made on November 2, 2023.

Bruno purchased the house on December 10, 2023, and began living in one of the units in the duplex as his principal place of residence on December 20, 2023.

Questions

(a) Given that Bruno only purchased a share of the duplex, will he be considered for purposes of the definition of “qualifying withdrawal” in subsection 146.6(1) to have acquired a "qualifying home" as defined in subsection 146.6(1) if all the conditions set out in that section for making a qualifying withdrawal are otherwise satisfied?

This question arises because, for the purposes of the HBP, subsection 146.01(2) provides certain deeming rules that apply in determining whether the conditions for benefiting from a non-taxable registered retirement savings plan ("RRSP") withdrawal have been met. For the purposes of the HBP, paragraph 146.01(2)(a) specifically provides that the acquisition of a qualifying home includes the acquisition by a taxpayer "jointly with one or more other persons" [3] . However, we do not find such a deeming rule for FHSA purposes. Furthermore, in the definition of "qualifying withdrawal" in subsection 146.6(1), there is a specific reference to one of the HBP special rules, namely, paragraph 146.01(2)(a.1), but no reference to paragraph 146.01(2)(a).

We are also aware that the rules applicable to the HBP and the FHSA, while having certain similarities, also have a number of differences.

(b) Would the answer be the same if Bruno had purchased the duplex with only one friend in equal shares and each of them lived in one of the housing units as their principal place of residence, if all the other conditions for making a qualifying withdrawal were otherwise satisfied?

(c) Would the answer be the same if Bruno had purchased the duplex with his wife in equal shares and they were living in one of the housing units as their principal place of residence and the other housing unit was rented, if all the other conditions for making a qualifying withdrawal were otherwise satisfied?

(d) Would the answer be the same if Bruno had instead purchased a bungalow with his wife in equal shares and that they lived in as their principal place of residence, if all the other conditions for making a qualifying withdrawal were otherwise satisfied?

(e) Would the answer be the same if Bruno had instead purchased a condo with his father in equal shares and only Bruno lived in this condo as his principal place of residence, if all the other conditions for making a qualifying withdrawal were otherwise satisfied?

CRA Response

An individual who, while the holder of an FHSA, wishes to make a qualifying withdrawal from this account for the acquisition of a qualifying home, must ensure that the amount the individual will receive as a benefit meets the conditions described in the definition of "qualifying withdrawal" in subsection 146.6(1).

Those conditions can be summarized as follows:

• The withdrawal must be made as a result of the individual’s written request in prescribed form in which the individual sets out the location of a qualifying home that the individual has begun, or intends not later than one year after its acquisition by the individual to begin, using as a principal place of residence (paragraph (a)).
• The individual must be resident in Canada from the time of the withdrawal until the earlier of the acquisition of the qualifying home and the individual's death. In addition, the individual must not, during the four calendar years preceding the particular year in which the withdrawal is made, and the period of the particular year ending on the 31st day preceding the withdrawal, have occupied an owner-occupied home (paragraph b)).
• The individual must have (before the withdrawal) entered into an agreement in writing for the acquisition or construction of the qualifying home before October 1 of the calendar year following the calendar year in which the amount was received (paragraph c)).
• The individual must not have acquired the qualifying home more than 30 days before the withdrawal was made (paragraph d).

Given the various situations described, the question that arises is whether a taxpayer who acquires a qualifying home with one or more other persons is considered to be acquiring a qualifying home for the purposes of the definition of "qualifying withdrawal".

We note that Parliament did not deem it necessary, in the context of that definition, to specify that the acquisition of the qualifying home in question may also include a joint acquisition with one or more persons, for example by means of a general deeming rule, as was done in paragraph 146.01(2)(a), which provides a deeming rule applicable to all of section 146.01, in the context of the rules relating to the HBP.

The fact that an acquisition may also include a joint acquisition with one or more persons is specified in various places in the Income Tax Act, for example in section 146.01, referred to above. Similarly, the definition of "principal residence" in section 54 states that it is a residence “owned, whether jointly with another person or otherwise, … by the taxpayer”. Section 146.6 itself, in the context of the FHSA, specifies in paragraph (c) of the definition of "qualifying individual" that the individual must not, for a certain period of time, inhabit a qualifying home that was, among other things, “owned, whether jointly with another person or otherwise". Another such statement is introduced by the reference to paragraph 146.01(2)(a.1) in subparagraph (b)(ii) of the definition of "qualifying withdrawal". However, it is not clear, in our view, that the mere reference to the acquisition of a qualifying home in the context of the definition of "qualifying withdrawal" can exclude the possibility of an acquisition made by the individual jointly with one or more persons. The acquisition referred to a number of times in the definition of "qualifying withdrawal" in subsection 146.6(1) is first and foremost the acquisition described in greater detail in paragraph (c) of that definition, i.e., an acquisition of the qualifying home that is provided for in a written agreement to which the individual is a party, which does not exclude the possibility of an acquisition by the individual jointly with one or more persons.

Parliament's intention in introducing section 146.6 was to “help individuals save for their first home” [4] . It seems clear that the legislator did not wish to exclude individuals who wish to purchase a qualifying home jointly with one or more persons, even if only for spousal couples. [5] .

Thus, in all the situations you have described, where Bruno is a party, along with one or more other persons, to a written agreement to acquire a property that is a qualifying home, and although Bruno is acquiring only a share of the ownership of that property, to the extent that the other conditions of the definition of "qualifying withdrawal" are otherwise satisfied, the CRA is of the view that the withdrawal made by Bruno could be a "qualifying withdrawal" for the purposes of section 146.6.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 3, 2023-0976921C6 F - CELIAPP - Acquisition d'une quote-part d'une habitation admissible / FHSA - Acquisition of a share of a qualifying home

Q.4 - Transfer of life insurance policy between connected corporations via trust

Particular Situation

• Aco is the holder and beneficiary of a life insurance policy, for which it pays the premiums, on the life of its controlling shareholder, Mr. X (the "Policy"). The Policy is an insurance contract payable on the death of Mr. X that was purchased a number of years ago for the purposes of the shareholders' agreement.
• The Policy has an FMV of $250, a cash surrender value ("CSV") of $150 and an adjusted cost basis ("ACB") of $50. The ACB, CSV and FMV of the Policy remained unchanged throughout the period relevant to the issues raised.
• All of the common (participating) shares of Aco are held by Mr. X's family trust ("Trust X").
• Trust X is a discretionary personal trust. Xco is both a capital and income beneficiary of Trust X.
• Xco is a holding company controlled by Mr. X.
• Aco and Xco are taxable Canadian corporations.
• Aco and Xco are connected corporations within the meaning of subsection 186(4) by virtue of the application of subsection 186(2).
• There is a non-arm's length relationship between Mr. X, Aco, Xco and Trust X.
• All the parties involved are resident in Canada.
• Under discussion is a sale by the shareholders of Aco of all of the shares in the capital stock of Aco to a third party on January 1 of next year.
• There is sufficient safe income on hand attributable to the common shares of Aco held by Trust X in respect of the value of the dividend contemplated below.
• Subsection 75(2) does not apply and has never applied to Trust X.

It is Mr. X's intention that the Policy be transferred to Xco in the following manner:

(1) In the year preceding the sale (“Year A1"), Aco will pay a dividend in kind to Trust X equal in value to the FMV of the Policy, in this case, $250. Trust X will include the $250 dividend income in computing its income. This will also result in a disposition of the Policy by Aco to Trust X to which subsections 148(1) and (7) will apply. Pursuant to the application of subsection 148(7), the disposition of the Policy by Aco and its acquisition by Trust X will be deemed to be made at the greatest of the value[6] of the Policy (i.e., its CSV of $150), the FMV of the consideration given ($0) and the ACB[7] of the Policy ($50). Aco would therefore have a taxable policy gain of $100.

(2) On December 31 of Year A1, Trust X will make a payment in kind in an amount equal to the dividend in kind (equal to the FMV of the Policy, i.e., $250) by transferring ownership of the Policy to its beneficiary, Xco, in accordance with subsections 104(6), (13) and (24). The deed governing Trust X permits a payment in kind. Trust X will also allocate and designate this amount to Xco in its income tax return for Year A1 in accordance with subsection 104(19). That amount will be included in the income of the beneficiary, Xco, and will retain its nature as a dividend since all the conditions set out in subsection 104(19) will be satisfied. Since Aco is connected to Xco in accordance with the rules in subsection 186(4), and the dividend does not entitle Aco to a dividend refund, Part IV tax will not apply to Xco. Since Xco is a corporation, no Part I tax will result because of the deduction provided for in computing taxable income pursuant to subsection 112(1).

(3) On the same day, Xco will receive the ownership of the Policy.

(4) On January 1 of the following year (“Year A2"), all of the shares of the capital stock of Aco will be sold to a third party.

Questions

(a) In Technical Interpretation 2011-0391781E5,[8] the CRA confirmed that, where a life insurance policy owned by a personal trust is distributed to a beneficiary resident in Canada in satisfaction of all or a portion of the beneficiary's capital interest in the trust, provided that subsection 107(4.1) does not apply to the distribution, subsection 107(2) takes precedence over subsection 148(7) so that there would be a tax-deferred rollover. By analogy, where Trust X transfers the Policy to Corporation X as a payment pursuant to subsections 104(6), (13) and (24) (designated pursuant to subsection 104(19)), will subsection 106(3) prevail over subsection 148(7), so that Trust X is deemed to have disposed of the Policy for proceeds equal to the FMV of the Policy?

(b) If subsection 148(7) prevails over subsection 106(3), where Trust X distributes the Policy to Xco as a payment pursuant to subsections 104(6), (13) and (24) (designated pursuant to subsection 104(19)), can CRA confirm what Trust X's proceeds of disposition of the Policy will be?

(c) Assume that in Steps 2 and 3, on December 31 of Year A1, instead of surrendering the Policy, Trust X issued a promissory note to Xco for an amount equal to the FMV of the Policy, the promissory note being payable on demand by the beneficiary, without any conditions being attached to the beneficiary's right. In the course of Year A2, the promissory note would be repaid by the transfer of the Policy from Trust X to Xco.

In this context, would subsection 107(2) apply to the distribution of the Policy by Trust X to its beneficiary, Xco, in Year A2?

CRA Response to Q.4(a) and (b)

In order to determine whether subsection 106(3) should apply in the situation described, it must first be determined whether Xco would receive the interest in the Policy in satisfaction of all or any part of its income interest in Trust X. If the answer to this question is yes, it must next be determined whether subsection 106(3) should then take precedence over subsection 148(7).

In order to conclude that Xco would receive the interest in the Policy in satisfaction of its income interest in Trust X, it would be necessary, first, for the interest in the Policy to form part of the income of Trust X for private law purposes (taking into account subsection 108(3))[9] and, second, that Xco is the beneficiary of the income of Trust X and is entitled to receive the interest in the Policy in accordance with the terms of the deed governing Trust X.

The determination of whether property received by a trust by way of a dividend in kind would be income or capital to the trust receiving it is a mixed question of law and fact. Such a determination can only be made following an exhaustive analysis of the applicable private law (in the case of a trust governed by Quebec civil law, Articles 909 and 910 C.C.Q.) and all the relevant facts and documents. That said, our understanding is that, generally speaking, under the applicable private law, the interest in a life insurance policy received by a trust by way of a dividend in kind paid by a corporation of which it is a shareholder would form part of the trust's income.

The distribution by Trust X of its interest in the Policy to its corporate beneficiary, Xco, would result in a disposition by Trust X of that interest in the Policy. Where income, for the purposes of subsections 104(6) and (13), [10] of a trust paid to a beneficiary is income within the meaning of the applicable private law and the trust pays that income in kind to the beneficiary by the distribution of property (such as an interest in a life insurance policy) in satisfaction of all or any part of the beneficiary's interest in the income of the trust, [11] subsection 106(3) could apply. Subsection 106(3) provides that, in such a situation, the trust is deemed to dispose of the property for proceeds equal to its FMV.

Subsection 148(7) applies where an interest of a policyholder in a life insurance policy is disposed of in any manner to a person with whom the policyholder was not dealing at arm's length. Under paragraph 251(1)(b), a personal trust [12] and its beneficiary are deemed not to deal with each other at arm's length. Thus, subsection 148(7) could apply where a trust transfers its interest in a life insurance policy to one of its beneficiaries.

Where subsection 148(7) applies to a disposition occurring after March 21, 2016, the policyholder is deemed to become entitled to receive, at the disposition time, proceeds of the disposition equal to the greatest of (i) the value of the interest at the time of disposition, [13] ; (ii) the FMV at the disposition time of the consideration, if any, given for the interest, and (iii) the ACB to the policyholder of the interest immediately before the disposition time. Pursuant to paragraph 148(7)(b), the person who acquires the interest as a result of the disposition is deemed to acquire it, at the time of the disposition, at a cost equal to that same amount.

In the case of the distribution of an interest in a life insurance policy by a corporation to its shareholder by way of a dividend in kind, CRA's position is that there is no consideration given for the interest for the purposes of clause 148(7)(a)(ii)(B). This position does not apply to the situation described, where a trust transfers its interest in a life insurance policy to its beneficiary. When a trust transfers property to a beneficiary, whether in payment of the trust's income or capital under the applicable private law, the beneficiary gives consideration for the transfer. This consideration may be all or any part of the beneficiary's income or capital interest, as the case may be.

Determining the FMV of an income interest in a trust at a particular time is a question of fact that can only be determined after considering all the relevant facts, circumstances and documents. However, in the situation described, to the extent that it would be determined that at the time of the disposition of the Policy, for the purposes of clause 148(7)(a)(ii)(B), the Xco beneficiary's income interest in Trust X included the right to require Trust X to pay an amount equal to the FMV of the Policy, it could then be argued that the part of Trust X's income interest that was given by Xco for the interest in the Policy had an FMV equal to the FMV of the Policy. In that context, the consequences of the disposition of the interest in the Policy would be the same for Trust X and Xco, regardless of whether subsection 106(3) or subsection 148(7) would prevail. It is not clear that such a result is consistent with tax policy. The CRA will bring this conclusion to the attention of the Department of Finance.

CRA Response to Q.4(c)

Subsection 107(2) applies inter alia if property of a personal trust is distributed by the trust to a beneficiary and there is a resulting disposition of all or any part of the beneficiary’s capital interest in the trust and certain additional conditions are satisfied.

In the situation described, in Year A2, Trust X would distribute its interest in the Policy in full payment of the promissory note it owed to its beneficiary Xco. Trust X would therefore repay a debt to its beneficiary by a payment in kind. Subsection 107(2) would not apply in those circumstances, since this would not be a situation where a distribution of trust property gives rise to a disposition of all or part of the beneficiary's capital interest in the trust. Rather, it would be a situation where a debtor repays its debt to its creditor.

The transfer by Trust X of its interest in the Policy to its beneficiary, Xco, in repayment of the note would be a disposition to which subsection 148(7) would apply since Trust X is deemed not to deal at arm's length with Xco by paragraph 251(1)(b).

In the situation described, the application of subsection 148(7) on the distribution by Aco of its interest in the Policy to its shareholder Trust X by way of a dividend in kind would result in Trust X being deemed to have acquired the interest in the Policy at a cost equal to $150 pursuant to paragraph 148(7)(b).

In Year A2, Trust X would be deemed by paragraph 148(7)(a) to have acquired the right to receive, at the time of disposition, proceeds of disposition equal to $250 (the greatest of (i) the CSV of the interest at that time ($150), (ii) the FMV, at that time, of the consideration given for the interest ($250) and (iii) the ACB of the interest to Trust X immediately before that time ($150)).

Regarding the consideration given for the interest, in the situation described, since the transfer of the interest in the Policy by Trust X to its beneficiary Xco would be in repayment of the promissory note, the consideration given by the beneficiary would correspond to the amount of the debt repaid. The FMV of the consideration given for the interest in the Policy would therefore be the FMV of the note, which, in the situation described, would represent an amount equal to the FMV of the interest in the Policy, i.e., $250.

The result for Trust X would be a taxable policy gain of $100 in respect of the disposition of the interest in the Policy. Pursuant to paragraph 148(7)(b), Trust X would be deemed to acquire the interest in the Policy at a cost equal to $250.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 4, 2023-0990531C6 F - Life insurance policy transfer

Q.5 - Partnership distribution of life insurance policy

Three individuals, A, B and C, carry on a business as a partnership. The partnership holds and is the beneficiary of life insurance policies, for which it pays the premiums, on the life of each partner. As provided in the partnership agreement, when a partner leaves the partnership, the partnership transfers ownership of the life insurance policy on the partner's life to the partner for no consideration.

Individual C leaves the partnership 10 years after it had acquired the life insurance policy. At that time, the policy's CSV is $10,000, its ACB is $4,000 and its FMV is $25,000.

Two years after leaving the partnership, Individual C donates the life insurance policy to a registered charity when the FMV of the policy is $30,000, the ACB is $5,000 and the CSV is $11,000.

Questions to CRA

(a) For purposes of calculating the policy gain resulting from the disposition of the life insurance policy by the partnership to Individual C, will the proceeds of disposition be determined under subsection 98(2) or under subsection 148(7)?

(b) For the purposes of subsection 248(35), is the period during which the partnership held the life insurance policy included in the period during which the individual held the policy?

CRA Response to Q.5(a)

Subsection 98(2) generally provides that where a partnership has disposed of property to a taxpayer who was, immediately before that time, a member of the partnership, the partnership is deemed to have disposed of the property for proceeds equal to its FMV at that time and the taxpayer will be deemed to have acquired the property at an amount equal to that FMV.

Subsection 148(7) applies if an interest of a policyholder in a life insurance policy is disposed of (other than a deemed disposition under paragraph 148(2)(b)) by way of gift, by distribution from a corporation or by operation of law only to any person, or in any manner whatever to any person with whom the policyholder was not dealing at arm’s length. Where subsection 148(7) applies to a disposition that occurs after March 21, 2016, under paragraph 148(7)(a), the policyholder's proceeds of disposition are equal to the greatest of (i) the value of the interest at the disposition time (as determined under subsection 148(9)), (ii) the FMV, at the disposition time, of the consideration, if any, given for the interest, and (iii) the ACB to the policyholder of the interest immediately before the disposition time. In addition, under paragraph 148(7)(b), the person that acquires the interest because of the disposition is deemed to acquire it, at the disposition time, at a cost equal to the amount determined under paragraph 148(7)(a) in respect of the disposition.

In the hypothetical situation described, where the conditions of subsection 98(2) are satisfied, we are generally of the view that subsection 98(2) would override subsection 148(7) so that the partnership's proceeds of disposition of the life insurance policy would be the FMV of the policy.

CRA Response to Q.5(b)

Subsection 238(35) provides a special rule for determining the FMV of property that is donated to a qualified donee, such as a registered charity. If certain conditions are satisfied, subsection 248(35) deems the FMV of the gifted property to be the lesser of the FMV of the property otherwise determined and, in the case of a life insurance policy in respect of which the taxpayer is a policyholder, the adjusted cost basis (as defined in subsection 148(9)), of the property to the taxpayer immediately before the gift is made. Under paragraph 248(35)(b), this deeming rule applies in respect of a particular property (including a life insurance policy) if the taxpayer acquired the property:

(i) less than three years before the date that the gift is made; or

(ii) less than 10 years before the day that the gift is made and it is reasonable to conclude that one of the main reasons for the acquisition was to make a gift of the property to a qualified donee.

In the hypothetical situation described, it is our view that the period during which the partnership held the life insurance policy is not included in the determination of the period during which Individual C was the policyholder of the life insurance policy for the purposes of subsection 248(35).

Official Response

2 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 5, 2023-0978561C6 F - Partnership – distribution of a life insurance police

Q.6 - Transfer of DSUs to corporation

Pursuant to paragraph 6(1)(a), the value of the benefit deemed to be received by a taxpayer pursuant to subsection 6(11) as part of a salary deferral arrangement ("SDA") must be added to the taxpayer's income. The concept of an SDA is defined in subsection 248(1) and refers, in brief, to a plan or arrangement that entitles a person to receive an amount after the year and that can reasonably be considered to have the purpose of postponing tax payable under the Income Tax Act on an amount owing to the person as salary or wages for services rendered in the year or a preceding taxation year. An SDA specifically excludes certain plans. In particular, paragraph (l) of the definition of SDA in subsection 248(1) excludes prescribed plans. Prescribed plans are listed in section 6801 of the Income Tax Regulations [14] and include deferred share unit plans described by paragraph 6801(d) I.T.R. ("DSU Plans").

Typically, under a DSU Plan covered by paragraph 6801(d), an employee may receive a portion of the employee’s annual bonus in the form of deferred share units ("DSUs") to be credited to a notional account. The value of those units is linked to the value of the shares of the corporation employing the employee (or a related corporation). For a DSU Plan to meet the conditions set out in paragraph 6801(d), all amounts receivable under the plan must be received after the time of the employee's death, retirement or loss of employment and no later than the end of the calendar year following that date.

Question

An employee is considering transferring his rights under a DSU Plan to a taxable Canadian corporation of which he is the sole shareholder ("Holdco"). Can the employee transfer his rights under the DSU Plan to Holdco by way of a rollover under section 85?

CRA Response

In order to transfer property to a corporation under section 85, the property must be eligible property. Only the properties listed in subsection 85(1.1) are eligible properties. These include capital property, resource property, inventory and certain other property specifically mentioned. In this case, to qualify as eligible property, the employee's rights under the DSU Plan would have to qualify as "capital property". Section 54 defines capital property as depreciable property and any property (other than depreciable property) any gain or loss from the disposition of which would be a capital gain or a capital loss of the taxpayer.

In this case, the employee's rights are neither depreciable property nor property the disposition of which would result in a capital gain or loss to the employee. Rather, an employee's rights under a DSU Plan generate income from an office or employment. Since the rights in the DSU Plan are not eligible property within the meaning of subsection 85(1.1), the transfer of those rights to a corporation cannot benefit from the rollover provided for in section 85.

Furthermore, the exception provided for in paragraph 6801(d) I.T.R. applies to a plan or arrangement established between a corporation and its employee (or the employee of a related corporation). Under such a plan, the employee receives or may receive amounts that are reasonably attributable to duties of an office or employment performed by the employee on behalf of the corporation. It is our view that rights under a DSU Plan may not be held by a person other than the employee with whom the agreement has been entered into. A transfer to another person would contravene the preamble to paragraph 6801(d), which requires that the agreement be between the corporation and the employee and that it be that employee who may receive amounts under the arrangement. Furthermore, we are of the view that the transfer of the employee's rights in the DSU Plan could indirectly allow the individual to access the value of the individual's rights before one of the times specifically identified in paragraph 6801(d)(i) I.T.R., which would also contravene the requirements of paragraph 6801(d).

Consequently, the plan or arrangement would no longer benefit from the exception provided for in paragraph (l) of the definition of SDA in subsection 248(1) and would qualify as an SDA in respect of the employee from the date of the transfer. As a result, the FMV of the deferred share units would be included in computing the employee's income in the year of the transfer (to the extent that such value had not already been included), as well as any subsequent appreciation in the value of the units, pursuant to subsection 6(11) and paragraph 6(1)(a).

Generally speaking, when a DSU Plan ceases to meet the conditions of paragraph 6801(d), it is possible, depending on the circumstances, that the arrangement was never a DSU Plan and that the plan qualifies as an SDA as soon as it was entered into. For example, we have in the past been called upon to consider a situation where a DSU Plan was prematurely terminated, with all issued DSUs being redeemed for a cash payment. As the redemption was not the result of exceptional circumstances, but rather was within the control of the employer and its employees, we concluded that the SDA rules applied retroactively to all DSUs granted. By analogy, we are of the view that the presence of a transfer that would be at the discretion of the employee and the employer could demonstrate that the parties never intended to meet the criteria required for the plan to qualify as a DSU plan. In such circumstances, the agreement or arrangement would qualify as an SDA from the time of its creation, resulting in the retroactive application of the SDA rules.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 6, 2023-0994241C6 F - Consequences of Transfer of DSUs to a corporation

Q.7 - Exceptions to Reg. 204.2(1) trust reporting

Pursuant to subsection 150(1.2), certain trusts that were not previously required to file a Trust Income Tax and Information Return [15] will be required to file such a return for taxation years ending after December 30, 2023. In addition, subsection 204.2(1) of the Regulations (I.T.R.) requires trusts with taxation years ending after December 30, 2023, but subject to certain exceptions, to provide a significant amount of information about their trustees and beneficiaries on the T3 Return.

More specifically, subsection 150(1.2) I.T.A. provides that subsection 150(1.1) does not apply to a taxation year ending after December 30, 2023 of a trust that is resident in Canada and that is an express trust, or for civil law purposes, a trust other than a trust that is established by law or by judgment, unless it falls within one of the exceptions described in paragraphs 150(1.2)(a) to (o).

Subsection 204.2(1) I.T.R. applies to any person who controls or receives income, gains or profits as trustee, or in a capacity analogous to that of trustee, in respect of a trust, other than a trust that falls within one of the exceptions listed in paragraphs 150(1.2)(a) to (o).

Questions

(a) Must a trust that does not come within the preamble to subsection 150(1.2) (for example, a Quebec trust that is established by law or by judgment), but that is a trust described in any of paragraphs 150(1.2)(a) to (o), provide the information set out in subsection 204.2(1) I.T.R.?

(b) Must a trust that does not come within the preamble to subsection 150(1.2) (for example, a Quebec trust that is established by law or by judgment) and that is not a trust coming within one of the exceptions described in paragraphs 150(1.2)(a) to (o), provide the information set out in subsection 204.2(1) I.T.R.?

CRA Response

A trust that is resident in Canada and that is an express trust or, for civil law purposes, a trust that is not established by law or by judgment, and that does not otherwise fall within one of the exceptions listed in paragraphs 150(1.2)(a) to (o), must file a T3 Return for any taxation year ending after December 30, 2023, without regard to subsection 150(1.1).

On the other hand, a trust to which subsection 150(1.2) does not apply, either because it does not come within the preamble to that subsection (because it is not resident in Canada or is not an express trust or, for civil law purposes, is a trust established by law or by judgment) or because it falls within one of the exceptions listed in paragraphs 150(1.2)(a) to (o), may nevertheless have to file a T3 Return. This could be the case, for example, if tax is payable by the trust for the year under Part I of the Income Tax Act, in which case a T3 Return is required pursuant to subsection 150(1) and subparagraph 150(1.1)(b)(i)

Pursuant to subsection 204.2(1) I.T.R., a trust that is required to file a T3 Return pursuant to subsection 150(1) for a taxation year ending after December 30, 2023, whether or not subsection 150(1.2) applies to the trust, must provide on its T3 Return all of the information required by subsection 204.2(1) I.T.R. (taking into account subsection 204.2(2) I.T.R.), unless it is a trust that falls within the exceptions listed in paragraphs 150(1.2)(a) to (o).

Consequently, a trust that does not come within the preamble to subsection 150(1.2), but that is a trust described in any of paragraphs 150(1.2)(a) to (o), if it is otherwise required to file a T3 Return under subsection 150(1) for a taxation year ending after December 30, 2023, will not have to provide the information set out in subsection 204.2(1) I.T.R. On the other hand, a trust that does not come within the preamble to subsection 150(1.2) and that is not a trust described in any of paragraphs 150(1.2)(a) to (o), but is otherwise required to file a T3 Return under subsection 150(1) for a taxation year ending after December 30, 2023, must provide the information set out in subsection 204.2(1) I.T.R.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 7, 2023-0994231C6 F - Additional reporting - trusts subject to exception

Q.8 - RPP transfer by estate to surviving spouse

Paul died on June 1, 2022. He was a member of a registered pension plan ("RPP") subject to the Supplemental Pension Plans Act [16] and no beneficiary designation had been made with respect to this plan.

Sylvie, his spouse, to whom he had been married for a number of years, was the sole heir to all his property under the terms of his last will. Following her husband's death, Sylvie, who was gravely ill, did not wish to receive the joint and survivor pension, but instead wanted the RPP administrator to pay her a lump sum equivalent to her pension entitlement. To that end, Sylvie waived in writing the joint and survivor pension that was payable to her.

Consequently, on January 15, 2023, the RPP administrator paid the estate a lump sum of $350,000 less source deductions of $130,000, for a net amount of $220,000.

Direct transfer

If the lump sum had been transferred directly to Sylvie's RRSP [17] , no tax consequences would have resulted. In fact, where a surviving spouse is entitled to receive a lump-sum amount (other than an actuarial surplus) from an RPP following the death of their spouse and the conditions of subsection 147.3(7) are satisfied, the direct transfer of the amount to the survivor’s RRSP would not have had any tax consequences. [18] .

Indirect transfer

For the rollover provided for in subsection 147.3(7) to apply, the transfer must be made directly. Thus, where the plan administrator pays the lump sum to the estate, which then pays it to the surviving spouse, subsection 147.3(7) cannot apply. In such a case, the conditions[19] of subsection 104(27) must be complied with to accomplish the rollover of the lump sum (other than an actuarial surplus) from the RPP to the surviving spouse's RRSP pursuant to paragraph 60(j)[20] .

In this context, let us add the following facts:

Paul's estate filed its first tax return designating itself as a GRE and its fiscal period ran from June 1, 2022 to May 31, 2023.

During that fiscal period, the estate paid Sylvie on May 1, 2023 $220,000 from the net amount that the RPP administrator had paid to the estate and an additional $130,000 with either:

1- other liquid assets of the estate; or

2- a demand note for $130,000.

Under the terms of the estate's first tax return and pursuant to subsection 104(27), the estate allocated $350,000 to Sylvie as a retirement benefit.

Pursuant to subsection 104(6), the estate, a testamentary trust, may deduct from its income amounts that are payable to a beneficiary [21] . The beneficiary was taxed on those amounts pursuant to subsection 104(13).

Sylvie wishes to transfer the amount received from the estate to her RRSP in order to benefit from a tax-free transfer pursuant to paragraph 60(j) and contributes $350,000 to her RRSP on October 1, 2023.

For the RRSP contribution to be deductible pursuant to paragraph 60(j), it must be made in the taxation year (or within 60 days after that year) in which the amount from the estate pursuant to subsection 104(27) was included in Sylvie's income. Since the estate's fiscal period runs from June 1, 2022 to May 31, 2023, the May 1, 2023 payment will not be allocated to Sylvie until the end of the estate's fiscal period, May 31, 2023. Sylvie will therefore be taxable on income of $350,000 in 2023 and her RRSP contribution of the same amount, made on October 1, 2023, will be deductible, making the lump-sum payment from the RPP tax-free.

Questions

(a) Assuming that all the other conditions set out in paragraph 60(j) and subsection 104(27) are met, can the CRA confirm that the fact of the use by the estate of an additional $130,000 from its other liquid assets to make up for the tax withheld by the plan administrator, will allow Sylvie to contribute $350,000 to her RRSP and to deduct such a contribution through the application of subsection 104(27) and paragraph 60(j)?

(b) If, using the same facts, but with the estate, instead of using cash from the estate, using the demand note of $130,000 to make up for the withholding tax and Sylvie, following receipt of the demand note, using her own funds to contribute $350,000 to her RRSP, will the CRA allow the deduction by the RRSP of $350,000 by applying subsection 104(27) and paragraph 60(j)?

(c) What would be the impact if Sylvie transferred the amount received from the estate to her FHSA up to the $40,000 limit and the difference to her RRSP?

CRA Response to Q.8(a) and (b)

Where an estate, considered to be a trust for purposes of the Income Tax Act, receives an amount as a superannuation or pension benefit, it must include that amount in computing its income pursuant to subparagraph 56(1)(a)(i) I.T.A. On the other hand, a single payment made pursuant to a superannuation or pension plan on the death of an employee or former employee constitutes a lump-sum payment from which the plan administrator must withhold tax in accordance with subsection 103(4) I.T.R. where it is paid to the estate of a member following the member’s death [22]

Paragraph 104(13)(a) I.T.A. provides that a beneficiary under a trust that is not described in paragraph (a) of the definition of "trust" in subsection 108(1) I.T.A. must include in computing the beneficiary's income for a particular year such part of the trust's income that became payable to the beneficiary in the trust's year that ended in the particular year. Paragraph 104(6)(b) I.T.A. provides that there may be deducted in computing the income of a trust for a taxation year the amount claimed by the trust that does not exceed the part of the trust's income for the year that became payable to a beneficiary in the year. The income referred to in both subsection 104(13) and subsection 104(6) is the trust's income determined in accordance with the provisions of the Income Tax Act. Furthermore, for the purposes inter alia of these provisions, subsection 104(24) I.T.A. provides that an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid to the beneficiary in the year or the beneficiary was entitled to enforce payment of the amount in the year. However, before considering the application of subsection 104(24), it must be determined whether, under the trust's governing instrument, all the relevant facts and the law applicable to the trust, the income became payable to the beneficiary.

Unless an express provision of the Income Tax Act allows the income character to be preserved, paragraph 108(5)(a) provides that amounts included in the income of a beneficiary of a trust under subsection 104(13) I.T.A. are deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source.

Subsection 104(27) allows a trust resident in Canada that is a GRE of a deceased individual to transfer, for certain purposes, including to its beneficiary who was the deceased individual's spouse or common-law partner at the time of the deceased individual's death, the character of certain superannuation or pension benefits received by the trust that can reasonably be considered to form part of the amount that was included in computing the beneficiary's income by reason of subsection 104(13), provided certain conditions are satisfied.

In order for subsection 104(27) to apply to deem a particular amount to be an eligible amount for the purposes of paragraph 60(j) to the beneficiary of the GRE who was the deceased individual's spouse or common-law partner at the time of the individual's death, certain conditions must be satisfied. In particular, it must be reasonable to consider (having regard to all the circumstances including the terms and conditions of the trust arrangement) that the amount reported by the GRE, for the purposes of subsection 104(27), in its return of income for the year in respect of that beneficiary, is an amount that represents a superannuation or pension benefit received by the GRE and that such amount forms part of the amount that, by reason of subsection 104(13), was included in computing the income for a particular taxation year of the beneficiary.

Thus, in the situation described, for the entire superannuation or pension benefit received by Paul's estate to be included in computing Sylvie's income pursuant to subsection 104(13), the entire superannuation or pension benefit from Paul's estate must have become payable to Sylvie in the year of the GRE for Paul ending on May 31, 2023.

Since Sylvie was the sole heir to all of Paul's property under his last will and testament, the full superannuation or pension benefit included in the income of the GRE for Paul, i.e., $350,000, could be considered payable to her in the year, subject to subsection 104(24).

If the GRE were to use an additional $130,000 from its other liquid assets to make up for the withholding tax deducted by the RPP administrator, the GRE would in fact pay Sylvie $350,000 on May 1, 2023. In this situation, subsection 104(24) I.T.A. would therefore not deem the $350,000 not to have become payable to Sylvia by Paul's GRE in its year ending May 31, 2023.

On the other hand, in the situation where the GRE instead issued a demand note for $130,000 to make up for the withholding tax, the $130,000 could constitute an amount that became payable to Sylvia by the GRE, within the meaning of subsection 104(24) for its year ending May 31, 2023, to the extent that the issuance of the note was permitted by the will and to the extent that the demand note was unconditional. However, if Sylvie could not demand payment of the promissory note because of a contingency or any other restriction, the conditions of subsection 104(24) would not be satisfied and the $130,000 would not have become payable by the GRE for its year ending May 31, 2023.

Provided that all the other conditions set out in paragraph 60(j) and subsection 104(27) were met and that Sylvie contributed to her RRSP, within the prescribed time, an amount equal to the amount included in her income under subsection 104(13) I.T.A. and allocated to her by the GRE of Paul pursuant to subsection 104(27) in accordance with the foregoing, Sylvie could as a result claim the deduction provided for in paragraph 60(j).

CRA Response to Q.8(c)

In accordance with paragraph 60(j), where a taxpayer who was the spouse or common-law partner of an individual, at the time of the individual's death, includes in computing the taxpayer's income for a particular taxation year an amount received by the taxpayer from the GRE of the deceased that is deemed by subsection 104(27) to be an eligible amount for the purposes of paragraph 60(j), the taxpayer may deduct in computing income for the year an amount equal to the amount so included provided that such amount does not exceed the total of all amounts paid by the taxpayer in the year or within 60 days after the end of the year:

(A) as a contribution to or under a RPP for the taxpayer’s benefit, other than the portion thereof deductible under paragraph 8(1)(m) in computing the taxpayer’s income for the year, or

(B) as a premium, within the meaning of subsection 146(1), to an RRSP under which the taxpayer is the annuitant, within the meaning of that subsection.[23] .

Paragraph 60(j) does not provide that an amount paid as a contribution to an FHSA qualifies for the deduction provided therein. Consequently, any portion of the amount that Sylvie received from Paul's GRE and that she transferred to her FHSA would not give rise to the deduction provided for in paragraph 60(j), even if that amount were otherwise deemed, under subsection 104(27) I.T.A., to be an eligible amount for the purposes of paragraph 60(j). It should also be noted that Sylvie could not contribute more than $8,000 to her FHSA in 2023 without an "excess FHSA amount" within the meaning of subsection 207.01(1) thereby resulting.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 8, 2023-0976901C6 F - RPP survivor benefit flowing through a GRE

Q.9 - Pt. XIII tax on registered plan distributions

Part XIII of the Income Tax Act applies to payments from registered education savings plans ("RESPs") (in accordance with paragraph 212(1)(r)) and registered disability savings plans ("RDSPs") (in accordance with paragraph 212(1)(r.1)) so as to provide for a 25% withholding on the amount paid or credited by a person resident in Canada to a non-resident. However, in Technical Interpretation 2013-0504641E5,[24] the CRA clarified that where RESPs are set up as trusts, it is possible, under Article XXII of the Canada-United States Income Tax Convention (the "Convention"), to apply the reduced rate of 15% generally applicable to payments from a Canadian trust to a non-resident beneficiary.

Questions

(a) Does Technical Interpretation 2013-0504641E5, which applies to RESPs constituted as trusts, also apply to RDSPs and Tax-Free Savings Accounts ("TFSAs") that are trusts?

(b) If so, is it possible to modify the CRA calculator, which does not specify this?

(c) In the case of payments from an RRSP or RRIF, where the Convention does not provide for a reduced rate, as is often the case for RRSP withdrawals, would the CRA apply the same position to RRSPs and RRIFs which are trusts, i.e., apply the reduced rate (15%) to payments from a Canadian inter vivos trust to a non-resident beneficiary?

CRA Response to Q.9(a)

RDSPs are generally governed by section 146.4. Any amount paid from an RDSP that is required to be included in computing a resident's income pursuant to section 146.4 and paragraph 56(1)(q.1), is subject to tax under Part XIII of the Income Tax Act pursuant to paragraph 212(1)(r.1) where that amount is paid or credited to a non-resident.

TFSAs are generally governed by section 146.2 Although TFSA income is generally tax-free, in certain situations amounts distributed to a taxpayer may be taxable. For example, any amount that would be required to be included in computing a taxpayer's income pursuant to paragraph 12(1)(z.5) and subsection 146.2(9) or section 207.061, if the taxpayer had been resident in Canada, is subject to tax under Part XIII of the Income Tax Act, pursuant to paragraph 212(1)(p), when it is paid or credited to a non-resident.

An RDSP, TFSA, RRSP or RRIF established as a trust is resident in Canada for the purposes of the Income Tax Act since the central management and control of the trust is situated in Canada, which is where the trustee resides and where the trustee must perform the obligations and duties imposed on the trustee under the Income Tax Act [25] . These trusts are also resident in Canada for the purposes of Article IV:1 of the Convention since their worldwide income is subject to tax in Canada [26] . Furthermore, in order to answer the questions posed, it was assumed that the beneficiaries of the RDSPs, TFSAs, RRSPs or RRIFs are residents of the United States for the purposes of Article IV of the Convention.

Since payments from RDSPs and TFSAs to US residents are not dealt with in any other Article of the Convention, they qualify as "other income" for the purposes of Article XXII:1 of the Convention.

Article XXII:2 of the Convention establishes a limit on the tax imposed by a Contracting State (i.e., Canada) of 15% of the gross amount of income distributed by a trust resident in a Contracting State (i.e., Canada) to a beneficiary who is a resident of the other Contracting State (i.e., the United States).

Consequently, the reduced rate of 15% provided for in Article XXII:2 of the Convention may be applied to amounts distributed from RDSPs and TFSAs to a U.S. resident where such RDSPs and TFSAs are constituted as trusts and are described in paragraph 212(1)(r.1) or 212(1)(p), as the case may be.

CRA Response to Q.9(b)

To reflect the above response, an update to the Non-Resident Tax Calculator will be considered.

CRA Response to Q.9(c)

RRSPs are generally governed by section 146. Any amounts received from an RRSP that must, pursuant to section 146, be included in computing the income of a taxpayer resident in Canada, are so included pursuant to paragraph 56(1)(h). Amounts that would be included in computing the income of a taxpayer resident in Canada pursuant to section 146 are subject to tax under Part XIII of the Income Tax Act, pursuant to paragraph 212(1)(l), when paid or credited to a non-resident.

RRIFs are generally governed by section 146.3. Any amounts received from a RRIF that are required pursuant to section 146.3 to be included in computing the income of a taxpayer resident in Canada are so included pursuant to paragraph 56(1)(t). Amounts that would be included in computing the income of a taxpayer resident in Canada pursuant to section 146.3, are subject to tax under Part XIII of the Income Tax Act, pursuant to paragraph 212(1)(q), when paid or credited to a non-resident.

Lump-sum or periodic pension payments may be made from an RRSP or RRIF. The CRA considers that lump sum payments made from an RRSP or RRIF constitute "pensions" for the purposes of Article XVIII:3(a) of the Convention because they are payments "under a superannuation, pension or other retirement arrangement" [27] .

However, the Income Tax Conventions Interpretation Act [28] defines the term "periodic pension payment" for the purposes of the Conventions. This section establishes certain limits as to what constitutes a "periodic pension payment", excluding, among other things, a payment made from an RRSP before its maturity. Thus, payments from RRSPs and RRIFs should constitute "periodic pension payments" for purposes of the Convention only to the extent that they constitute "periodic pension payments" for purposes of section 5 of the I.T.C.A.

As stated above, Article XXII of the Convention only applies where the items of income of a resident of a Contracting State are not dealt with in the Articles preceding Article XXII of the Convention. Given that RRSP and RRIF amounts paid to U.S. residents constitute "pensions" for purposes of Article XVIII:3(a) of the Convention, Article XXII of the Convention will not apply to payments from RRSPs or RRIFs. Thus, holding RRSPs and RRIFs in trust will not change the fact that income from those plans will be considered "pension" income for purposes of the Convention. In addition, as stated above, the reduced rate of 15% provided for in Article XVIII:2(a) of the Treaty could apply to payments from RRSPs or RRIFs that constitute "periodic pension payments" within the meaning of section 5 of the I.T.C.A.

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 9, 2023-0976941C6 - Withholding on registered plans

Q.10 - S. 261(2) conversion of imputed interest

The Income Tax Act provides for the inclusion of imputed interest for certain financial products. For example, this is the case for prescribed debt obligations, such as stripped coupons, pursuant to subsection 12(9).

Subsection 261(2) provides that a taxpayer is required to report its Canadian tax results in Canadian dollars and, on page 12 of the Federal Income Tax and Benefit Guide, [29] it is stated that "[i]n certain circumstances described in Income Tax Folio S5-F4-C1, Income Tax Reporting Currency, an average rate may be used to convert foreign currency amounts”.

Question

Where a security, such as a stripped coupon on which the Income Tax Act deems interest to accrue, is denominated in a foreign currency, what date should be used to apply the exchange rate?

CRA Response

This answer assumes that the taxpayer holding the stripped coupon is not a financial institution.

Where a taxpayer acquires an interest in, or a right to, a debt obligation to which the Income Tax Regulations apply, an amount calculated in the prescribed manner is deemed to have accrued as interest on that debt obligation in each taxation year in which the taxpayer holds the interest or right. Thus, subsection 12(9) subjects accrued interest on prescribed debt obligations to tax in order to ensure that income attributable to the return on the obligation is taxed as interest. Subsection 12(9) will generally take into account the cost of a stripped coupon and will therefore generally not tax the taxpayer on the full amount of the stripped coupon.

Subsection 7000(1) I.T.R. provides the definition of "prescribed debt obligation" for the purposes of subsection 12(9) and subsection 7000(2) I.T.R. provides the formula for determining the amount that is deemed to accrue on a debt obligation as interest to a taxpayer in each taxation year in which the taxpayer holds an interest in a prescribed debt obligation. Pursuant to paragraph 7000(1)(b), a "prescribed debt obligation" includes a debt obligation in respect of which the proportion of the payments of principal to which the taxpayer is entitled is not equal to the proportion of the payments of interest to which the taxpayer is entitled. A stripped coupon is generally a "prescribed debt obligation" pursuant to paragraph 7000(1)(b).

Pursuant to subsection 12(9.1), where a taxpayer disposes of a stripped coupon, the portion of the proceeds of disposition received that can reasonably be considered to be a recapture of the cost of the interest or right on the debt obligation is not included in computing the taxpayer's income[30] .

Paragraph 261(2)(a) provides that a taxpayer should generally convert any amount that is required to be taken into account in computing the taxpayer's "Canadian tax results" into Canadian dollars "using the relevant spot rate for the day on which the particular amount arose.”

The term "relevant spot rate", defined in subsection 261(1), will generally be the rate quoted by the Bank of Canada on the particular day (or the closest preceding day if not quoted on the particular day).

The definition of "Canadian tax results" in subsection 261(1) includes, among other things, any amount that is relevant in determining income, taxable income, or taxable income earned in Canada and the amount of tax payable or refundable. Any amount included in the calculation of deemed accrued interest under subsection 12(9) is therefore relevant in determining Canadian tax results (the taxpayer's income in this case) and must be converted into Canadian dollars on the day it arose.

It should be noted that the amount of deemed accrued interest under subsection 12(9) that will be included in income varies, by virtue of subsection 12(3) or 12(4), depending on the type of taxpayer. Subsection 12(3) applies to a corporation, partnership, unit trust or any trust of which a corporation or partnership is a beneficiary. Subsection 12(4) applies to taxpayers to whom subsection 12(3) does not apply.

For the purposes of determining, pursuant to paragraph 261(2)(a), the relevant spot rate in determining the income of a taxpayer holding a stripped coupon to which subsection 12(3) applies, the day on which the amount of interest deemed to accrue under subsection 12(9) arises is generally each day of the taxation year in which the accrued interest arises. This period ends at the end of the taxpayer's taxation year or on the day the interest is received if the interest is received before the end of the taxation year.

For a taxpayer holding a stripped coupon to which subsection 12(4) applies, the day on which the amount corresponding to the accrued interest arises will generally be each day of the taxation year during which the accrued interest is generated. This period extends to the "anniversary day", as defined in subsection 12(11) (the anniversary day includes the day on which the contract was disposed of).

The accrued interest to be included in a taxpayer's income in respect of a stripped coupon is that generated during the days indicated in subsections 12(3) and 12(4). Consequently, where the stripped coupon is denominated in a foreign currency, the interest deemed to have accrued during that period on that stripped coupon is determined in the foreign currency, pursuant to subsection 7000(2) I.T.R., and the exchange rate applicable to the conversion of that currency into Canadian dollars for the portion accrued during each of those days must be used.

Furthermore, for the purposes of calculating capital gains or losses on a security such as a stripped coupon, the cost of each security must be converted into Canadian dollars using the relevant spot rate on the day of acquisition and the proceeds of disposition must be converted using the relevant spot rate on the day of disposition of the stripped coupon pursuant to subsection 261(2).

Official Response

3 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 10, 2023-0978651C6 - Exchange rate for a stripped interest coupon