This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether the transfer of a share of a credit union can be subject to the advantage rules pursuant to Part XI.01?
Reasons: Application of the Law.
Notary, M. Fisc.
November 7, 2012
Subject: Advantage by virtue of section 207.01
This is in response to your letter of February 21, 2012 in which you requested information regarding shares of the capital stock of a credit union ("shares") held by an individual who wishes to transfer those shares to a registered retirement savings plan ("RRSP"), a registered retirement income fund ("RRIF") or a tax-free savings account (“TFSA”).
In particular, you wish to know whether the transfer of such shares between an individual and a RRIF, RRSP or TFSA ("registered plan") comes within the concept of advantage as defined in subsection 207.01(1) of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
As explained in Information Circular 70-6R5, it is not the practice of the Directorate to comment on proposed transactions that relate to specific taxpayers otherwise than in the form of an advance income tax ruling. We are, however, prepared to provide the following general comments, which may be helpful to you.
The concept of "advantage" is defined in subsection 207.01(1), and 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."
The term "swap transaction" is defined in subsection 207.01(1) and includes, in respect of a registered plan, any transfer of property between the plan and its controlling individual (footnote 1) or a person with whom the controlling individual does not deal at arm’s length (footnote 2). However, paragraphs (a) through (d) of this definition specify transfers and payments that are not swap transactions. These exceptions to the concept of swap transaction are as follows:
(a) a payment out of or under the registered plan in satisfaction of all or part of the controlling individual’s interest in the registered plan;
(b) a payment into the registered plan that is a contribution, a premium, or an amount transferred in accordance with paragraph 146.3(2)(f);
(c) a transfer of a prohibited investment or a non-qualified investment from the registered plan, in circumstances where the controlling individual is entitled to a refund under subsection 207.04(4) on the transfer; or
(d) a transfer of property from one registered plan of a controlling individual to another registered plan of the controlling individual if
(i) both registered plans are RRIFs or RRSPs, or
(ii) both registered plans are TFSAs.
The Act does not provide for any special exception to the concept of swap transaction for the transfer of shares of a credit union. Consequently, subject to the exceptions noted above, any increase in the FMV of property held under a registered plan that is reasonably considered, in the circumstances, to be attributable, directly or indirectly, to the transfer of the shares will be considered an advantage. In this regard, the fact that the transfer of the shares is made at their FMV is irrelevant.
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.
In your letter, you indicated to us that XXXXXXXXXX, the shares must initially be issued to members. As a result, the application of the advantage rules could adversely affect the capitalization of the network. In this regard, the CRA's mandate is to administer the Act while responsibility for the development of tax policies and amendments to the Act rests with the Department of Finance. If you wish to comment or make representations regarding whether the transfer of credit union shares may be subject to the advantage rules in Part XI.01, you may send them to the following address:
Department of Finance
Income Tax Legislation Division
140 O'Connor Street
17th floor, East Tower
Ottawa ON K1A 0G5
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 The definition of controlling individual is found in paragraph 207.01(1) and references the holder of a TFSA or the annuitant of a RRIF or RRSP.
2 For more information on the concept of non-arm's, see Interpretation Bulletin IT-419R2, Meaning of Arm's Length, available on the Canada Revenue Agency Web site. ("CRA") at the following address: http://www.cra-arc.gc.ca/E/pub/tp/it419r2/it419r2-04f.pdf
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