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.
An RRSP trust owns a "pre-budget" prohibited investment that didn't increase in value since March 22, 2011.
1) Does the sale of that prohibited investment to a third party at fair market value result in an advantage subject to the tax under subsection 207.05(1)?
2) Does a deemed dividend, pursuant to subsection 84(3), on the redemption of that prohibited investment result in an advantage subject to the tax under subsection 207.05(1)? If yes, can subsection 207.05(4) apply?
2) Yes, the deemed dividend will be an advantage subject to the tax under subsection 207.05(1). However, if all the conditions in subsection 207.05(4) are met, the dividend would not be subject to the tax under 207.05(1).
1) There is no capital gain that accrued after March 22, 2011.
2) A dividend is considered earned when it is received. Therefore, it will be an advantage at the time it is received.
Notary, M. Fisc.
June 6, 2013
Subject: Dividend deemed to be generated by a prohibited investment
This letter is in response to your e-mail of June 12, 2012 asking for information regarding the application of section 207.05 of the Income Tax Act (the "Act").
Unless otherwise indicated, all statutory references herein are to the provisions of the Act. In addition, any reference to "Proposals" refers to legislative proposals that the Department of Finance issued on December 21, 2012, which, among other things, amend the rules in Part XI.01.
Specifically, your questions relate to a situation where a trust governed by a registered retirement savings plan ("RRSP trust") holds a share that was a property held by a registered retirement savings plan on March 22, 2011 and that was an investment banned March 23, 2011 ("pre-budget prohibited investment"). You indicated that the fair market value ("FMV") of the share did not increase after March 22, 2011. Your questions are as follows:
- Is the capital gain from the sale of the share to a third party subject to the tax under subsection 207.05(1)?
- Is the deemed dividend resulting from the redemption of the share considered to be from the value accumulated at March 22, 2011? If no, does the transitional rule in subsection 207.05(4) apply?
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 through advance rulings. We are, however, prepared to provide the following general comments, which may be helpful to you.
By virtue of subsection 207.05(1), a 100% tax is payable under Part XI.01 if, in the year, an advantage in relation to a registered plan (which includes an RRSP trust) is extended to, or is received or receivable by, the controlling individual of the registered plan, a trust governed by the registered plan, or any other person who does not deal at arm’s length with the controlling individual.
The concept of "advantage" is defined in subsection 207.01(1). According to this definition, as modified by the Proposals, an advantage includes, among other things, any profit that represents income (excluding the gross-up of dividends) or a capital gain that is reasonably attributable, directly or indirectly, to a prohibited investment. (footnote 1) This rule applies to any income earned after March 22, 2011 and any realized capital gains that accrued after March 22, 2011. To facilitate the calculation of the realized capital gain after March 22, 2011, subsection 207.01(7) of the Proposals provides that for the calculation of the adjusted cost base ("ACB"), the cost of a pre-budget prohibited investment is deemed to be equal to the FMV of that investment at the end of March 22, 2011.
In the situation you submitted, the FMV of the property at the end of March 22, 2011 (therefore the cost of the property under subsection 207.01(7)) equals the proceeds of disposition paid by a third party. The disposition of this property would not result in a capital gain. Therefore, this provision would not generate an advantage under paragraph (c) of the Proposals from the definition of that term in subsection 207.01(1).
A dividend must be included in computing a taxpayer's income when it is received. A dividend received after March 22, 2011 that it is reasonable to attribute directly or indirectly to a prohibited investment is an advantage. The Act does not contemplate any relieving measure to permit such a dividend to be considered to be derived from value accumulated prior to March 23, 2011.
However, subsection 207.05(4) provides a transitional measure that may result in the tax under subsection 207.05(1) not being applied. To qualify for transitional relief, the following conditions must be met:
The annuitant of the RRSP trust must have made an election (footnote 2) in prescribed form.
- The amount of the benefit must be included in the calculation of the "transitional prohibited investment benefit” as defined in subsection 207.01(1) (footnote 3).
- That transitional prohibited investment benefit must be paid to the annuitant of an RRSP trust within 90 days after the end of the taxation year.
- That amount must not be paid by way of a transfer to another RRSP or RRIF of the Annuitant.
Consequently, in the situation you submitted, it may be possible to benefit from the transitional rules if the above conditions are met.
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 Paragraph (c) of the Proposals’ definition of advantage in subsection 207.01(1).
2 According to the recommendations of the Department of Finance, the deadline for filing Form RC341, Election on Transitional Prohibited Investment Benefit for RRSPs or RRIFs, was March 1, 2013.
3 The definition of transitional prohibited investment benefit was amended in the December 2012 Proposals. Among these amendments is the requirement that the income or capital gain be earned or realized, as the case may be, before 2022, is eliminated.
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