3 May 2006 External T.I. 2006-0178491E5 - Spousal RRSP LSF tax credit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Who can claim the Labour Sponsored Fund Tax Credit where a contributor makes a contribution (other than approved LSF shares) to a spousal RRSP and the RRSP trust then acquires LSF shares?

Position: Either the contributor or the annuitant of the spousal RRSP can claim the LSF tax credit but they cannot split the LSF credit.

Reasons: Subsections 127.4(6) and 124.7(2) and definition of qualifying trust in subsection 127.4(1) and spousal trust in subsection 146(1).

XXXXXXXXXX 								2006-017849

May 3, 2006

Dear XXXXXXXXXX:

Re: Spousal Registered Retirement Savings Plans (RRSPs)
and Labour Sponsored Fund (LSF) Tax Credits

We are replying to your request for further clarification of our March 16, 2006 letter (2005-015487) concerning the claiming of LSF tax credits where a spousal RRSP uses funds contributed to it to acquire LSF shares. The specific scenario that concerns you was addressed as follows in our March 16th letter:

"In the second scenario, a taxpayer makes a contribution (other than approved shares) to an RRSP under which his or her spouse is the annuitant and then the spousal RRSP trust acquires approved shares. In this case, for 1998 and subsequent taxation years, either the taxpayer who made the contribution or his/her spouse who is the annuitant under the spousal RRSP, but not both, may claim the LSF tax credit. It is not permissible for the spouses to split the LSF tax credit."

Based on your view of comments in the 2005 General Income Tax and Benefit Guide, you are not in agreement with our view that the splitting of credits is not possible. Further, you comment that our interpretation adds costs throughout as you are aware that rather than being able to make one purchase of an approved share generating one reporting slip with an LSF tax credit that can be split upon filing, spousal RRSPs generally follow our position and undertake multiple purchases of an approved share generating multiple reporting slips with LSF tax credits, each unique slip of which is then claimed by the spouses as they see fit upon filing.

Our Comments

We had given you our views on the phone prior to sending written confirmation in the March 16, 2006 letter. You are also aware that the industry in general follows our interpretation. As your views are based on your interpretation of general comments in a Guide, we are providing a detailed technical analysis that we trust will be of assistance.

Subsection 127.4(2) of the Income Tax Act (the "Act") provides for the deduction from tax otherwise payable by an individual (other than a trust) of a labour sponsored funds tax credit. Subsection 127.4(6) of the Act states that "an individual's labour-sponsored funds tax credit in respect of an original acquisition of an approved share is equal to the least of (a) 15% of the net cost to the individual (or to a qualifying trust for the individual in respect of the share) for the original acquisition of the share by the individual or the trust."

Our view that it is not possible to split a labour-sponsored funds tax credit in relation to the acquisition of an approved share by a spousal trust is based on the definitions of "qualifying trust" in subsection 127.4(1) of the Act and also on "spousal plan" in subsection 146(1) of the Act.

The definition of "qualifying trust" applicable to the 1998 and subsequent taxation years is as follows:

"qualifying trust" - "qualifying trust" for an individual in respect of a share means

(a) a trust governed by a registered retirement savings plan, under which the individual is the annuitant, that is not a spousal plan (in this definition having the meaning assigned by subsection 146(1)) in relation to another individual, or

(b) a trust governed by a registered retirement savings plan, under which the individual or the individual's spouse or common-law partner is the annuitant, that is a spousal plan in relation to the individual or the individual's spouse or common-law partner, if the individual and no other person claims a deduction under subsection 127.4(2) in respect of the share;"

The definition of "spousal plan" in subsection 146(1), now "spousal or common-law partner plan", in relation to a taxpayer "means (a) a registered retirement savings plan (i) to which the taxpayer has, at a time when the taxpayer's spouse or common-law partner was the annuitant under the plan, paid a premium, or (ii) that has received a payment out or a transfer from a registered retirement savings plan or a registered retirement income fund that was a spousal or common-law partner plan in relation to the taxpayer, or (b) a registered retirement income fund that has received a payment out of or a transfer from a spousal or common-law partner plan in relation to the taxpayer."

To substitute Mr A as the individual or taxpayer, as the case may be, and Mrs A as the spouse or common-law partner into these definitions the following occurs:

"An individual's [Mr A's] labour-sponsored funds tax credit [under subsection 127.4(6) of the Act] in respect of an original acquisition of an approved share is equal to the least of (a) 15% of the net cost to the individual [Mr A] (or to a qualifying trust for the individual [Mr A] in respect of the share) for the original acquisition of the share by the individual [Mr A] or the trust [the share is acquired by the trust]."

For spousal trusts, the only part of the "qualifying trust" definition that is relevant is paragraph (b) so that "qualifying trust" for an individual [Mr A] in respect of a share means...(b) a trust governed by a registered retirement savings plan, under which the individual [Mr A] or the individual's spouse or common-law partner [Mrs A] is the annuitant [Mrs A is], that is a spousal plan in relation to the individual [Mr A] or the individual's spouse or common-law partner [Mrs A] [it is in relation to Mr A - see the definition of spousal plan below] if the individual [Mr A] and no other person claims a deduction under subsection 127.4(2) in respect of the share;"

In the scenario under consideration, paragraph (a) of the definition of "spousal plan" in subsection 146(1), now "spousal or common-law partner plan", is relevant such that spousal plan in relation to a taxpayer [Mr A] "means (a) a registered retirement savings plan (i) to which the taxpayer [Mr A] has, at a time when the taxpayer's spouse or common-law partner [Mrs A] was the annuitant under the plan, paid a premium" [Mr A did pay the premium and Mrs A was the annuitant].

Accordingly, if Mr A is substituted as the individual and taxpayer and Mrs A the spouse or common-law partner, Mr A can deduct the labour-sponsored funds tax credit in relation to an approved share purchase if only Mr A and no other person claims the deduction in respect of the purchase of that share.

Now to substitute Mrs A as the individual and Mr A as the spouse or common-law partner, or taxpayer, as the case may be:

Under subsection 127.4(6) of the Act, "an individual's [Mrs A's] labour-sponsored funds tax credit in respect of an original acquisition of an approved share is equal to the least of (a) 15% of the net cost to the individual [Mrs A] (or to a qualifying trust for the individual [Mrs A] in respect of the share) for the original acquisition of the share by the individual [Mrs A] or the trust [the share is acquired by the trust]."

For spousal trusts, the only part of the "qualifying trust" definition which is relevant is (b) such that the "qualifying trust" for an individual [Mrs A] in respect of a share means (b) a trust governed by a registered retirement savings plan, under which the individual [Mrs A] or the individual's spouse or common-law partner [Mr A] is the annuitant [Mrs A is the annuitant], that is a spousal plan in relation to the individual [Mrs A] or the individual's spouse or common-law partner [Mr A] [it is in relation to Mr A - see same definition of spousal plan above], if the individual [Mrs A] and no other person claims a deduction under subsection 127.4(2) in respect of the share;"

Accordingly, if Mrs A is substituted as the individual and Mr A the spouse or common-law partner or taxpayer, Mrs A can deduct the labour-sponsored funds tax credit in relation to a share purchase if only Mrs A and no other person claims the deduction in respect of the purchase of that share.

Based on the above, either spouse may claim the labour-sponsored funds tax credit in relation to an original acquisition of an approved share by a spousal trust, however, there can be no splitting of the credit as only one individual and no other person can claim a deduction under subsection 127(4) in respect of such a share.

Yours truly,

Roberta Albert, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch