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: 1) Whether a holder of a TFSA is eligible to make an in-kind contribution to the TFSA in light of proposed legislative amendments.
2) Whether the frequency of property transfers to or from a TFSA would affect the determination that a particular transfer is a "swap transaction" pursuant to the proposed amendments.
3) Whether a TFSA trust may enter into an agreement to sell a call option on shares that are available through exercise of warrants held within the trust.
Position: 1) Generally, yes.
Reasons: 1) The proposed definition of "swap transaction" excludes a transfer of property that is a distribution from or contribution to a TFSA trust.
2) Based on wording included in the proposed legislation.
3) The TFSA trust would be regarded as having written a naked call option, which may result in the trust being considered to be carrying on a business.
R. Demeter, CGA
August 24, 2010
Dear XXXXXXXXXX :
Re: Tax-Free Savings Account - Swap Transaction
This is in reply to your email of March 1, 2010, in which you sought clarification on the application of proposed amendments to the Income Tax Act ("ITA") in respect of rules governing the use of a Tax-Free Savings Account ("TFSA"). These amendments were initially announced by the Minister of Finance on October 16, 2009, and released by the Department of Finance on April 30, 2010.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an Advance Income Tax Ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
For the purposes of this letter, we have assumed that the shares or warrants referred to below constitute a qualified investment for a trust governed by a TFSA pursuant to subsection 207.01(1) of the ITA.
In your email, you have asked whether, in light of the proposed amendments, it remains possible to contribute securities, such as shares or warrants, to a TFSA. In this regard, we note that the proposed legislation introduces the term "swap transaction" in respect of a TFSA trust applicable to transfers of property occurring after October 16, 2009. More specifically, a swap transaction refers to a transfer of property between a TFSA trust and the holder of the TFSA, or persons not dealing at arm's length with the holder of the TFSA, but does not include a transfer of property that is either a distribution from or a contribution to a TFSA.
As such, where the holder of a TFSA makes a contribution of securities, such as shares or warrants, to their TFSA that does not constitute a swap transaction, the holder will be treated as having made a contribution equal to the fair market value ("FMV") of the securities at that time, subject to the holder's unused TFSA contribution room. The contribution will result in a disposition of the contributed securities by the holder of the TFSA and an acquisition of the securities by the TFSA.
The FMV of a particular warrant is a question of fact. The Canada Revenue Agency ("CRA") is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV. Rather it is the CRA's view that a valuation method that is appropriate in the circumstances should be used to determine the FMV of an option, warrant, or similar right.
You have also asked whether the frequency of transactions involving the transfer of property to or from a TFSA would be of importance when identifying a "swap transaction" in respect of a TFSA trust. As noted earlier, the proposed definition of "swap transaction" applies to any transfer of property between a TFSA trust and the TFSA holder, or persons with whom the holder does not deal at arm's length, other than a distribution from or a contribution to the TFSA trust. Accordingly, each transfer is viewed individually in order to determine whether it constitutes a swap transaction.
Your final question concerns a hypothetical situation in which certain warrants are held within a TFSA trust. The warrants provide their holder the right to acquire, either immediately or at some time in the future, shares of a corporation. You ask whether the TFSA trust can enter into a contract to sell such shares at a future date (i.e., writing a call option on the shares) while continuing to hold the respective warrants.
The CRA would not consider the holding of warrants by a TFSA trust to constitute ownership by the trust of the underlying shares available upon exercise of the warrants. On this basis, the transaction that you have described appears to be similar in nature to the writing of a naked call option, which is discussed in paragraph 23 of Interpretation Bulletin IT-320R3. The CRA is of the view that the writing of a naked call option by a TFSA trust may constitute the carrying on a business by the trust. For purposes of applying subsection 146.2(6) of the ITA, where a TFSA trust is considered to be carrying on a business, the trust will be taxable to the extent of the income earned from that business.
We trust that these comments will be of assistance.
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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