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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Validity and implications of 259 elections.
Position:
General comments provided
Reasons:
Admin relief required
December 18, 1995
Headquarters Headquarters
Registered Plans Division W.C. Harding
Stella M. Black (613) 957-8953
Director
7-952745
Section 259 Elections and Non-qualified Investments
Your File HDL 8199-7
This is in reply to your memorandum of October 17, 1995, in which you referred a submission from
XXXXXXXXXX
XXXXXXXXXX
Facts:
The following facts were provided in XXXXXXXXXX submission.
XXXXXXXXXX
XXXXXXXXXX
Issues
You have indicated you are concerned about the following:
A.Are three of the elections valid given that they were made without the knowledge of the trustees of the funds;
B.If all the elections are valid, is there a problem in that they were not made in time to cover the full period throughout which the investments were held;
C.Do the elections have any effect for the DPSPs, since the rules in section 259 of the Act do not appear to work in conjunction with section 198 of the Act; and
D.Are there any foreign property limit concerns.
We have provided general comments below, on the application of the Act to the specific concerns you raised in your memorandum. However, we have not provided any comments with respect to any administrative positions or relief that may be offered. In the circumstances, it is our opinion that the investment activities of the funds, the investment activities of the particular investors, and the filing of the elections, are all completed transactions made by XXXXXXXXXX the trusts or the investors, as the case may be, and are, as such, subject to audit and reassessment by the Department as considered warranted by the Audit Directorate. We also think it would be appropriate for your Division to deal with the issues through your audit section since the matters pertain to the validity of the elections filed with your division. Of course, in either case we will be pleased to assist either yourself or the Audit Directorate in resolving the issues.
A. Are any of the Elections Valid?
Subsection 259(1) applies where, at any time, a taxpayer described in section 205 of the Act acquires, holds or disposes of a particular unit in a qualified trust, and the trust elects for any period that includes that time to have the provisions of the section apply. Subsection 104(1) of the Act also provides as follows:
"In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") shall be read as a reference to the trustee or the executor, administrator, heir or other legal representative having ownership or control of the trust property".
Subsection 104(1) is intended to address situations where a trustee exists or, where a trustee does not exist, to such other legal representative as does have control or ownership of the property held in trust. The wording of subsection 104(1) is not intended to address situations where a trustee and an administrator co-exist. However, in our opinion, it is not likely that such a circumstance could occur because a trust can only exists when three elements are present; certainty of intention, certainty of subject matter and certainty of object. The first of these, the certainty that property is to be held by the named trustee, would clearly not exist if the actual intent of an arrangement is to have control of a trust's property rest in some other legal representative.
In our opinion XXXXXXXXXX is not the trustee of the funds in question because of the existence of the declaration of trust it entered into with the named trustees of the funds, because XXXXXXXXXX does not have ownership of the trust property and because there is no indication that XXXXXXXXXX was to act as trustee (as discussed above).Furthermore, if XXXXXXXXXX is the "trust" within the meaning of subsection 104(1) of the Act, because it is an administrator or other legal representative having control of the trust property, the elections would appear to be invalid from the beginning. XXXXXXXXXX is not, as far as we know, a corporation that is licensed to act as a trustee. Accordingly, the funds could not be "qualified trusts" as defined in subsection 259(5) of the Act and the elections could not be valid.
On the other hand, based on the information provided, it is our view XXXXXXXXXX could have made the elections as an agent of the fund's trustees. However, this would only be true if the elections were made in accordance with the management agreements with the trustees. In this respect, XXXXXXXXXX indicates the management agreements do not state that XXXXXXXXXX could make such elections. However, XXXXXXXXXX does not state that the agreements prevent XXXXXXXXXX from making the elections. Accordingly the elections could be valid if it is determined that XXXXXXXXXX filed them as an agent of the trustees.
With respect to the XXXXXXXXXX noted that the trustees knew of the election. However, in our opinion, this is not, of itself, sufficient to establish an agency relationship exists.
B & C
If all the elections are valid, is there a problem in that they were not made in time to cover the full period throughout which the investments were held?
Will the elections have any effect for the DPSPs, since the rules in section 259 of the Act do not appear to work in conjunction with section 198 of the Act?
We are not clear as to why XXXXXXXXXX has raised the issue on the interaction of section 198 and 259 since we can not determine where they do not work together in any way that is dissimilar to how they work in relation to subsections 146(6) and (10) of the Act. We have therefore combined our comments for B and C.
Subsection 259(1) of the Act applies where at any time a taxpayer, described in section 205 of the Act, acquires, holds or disposes of a particular unit in a qualified trust, and the trust elects for any period that includes that time, to have the provisions of the section apply. The paragraphs in subsection 259(1) of the Act then provide specific rules that must apply to any particular unit acquired, held or disposed of in the period and the proportionate part of the trust property that is represented by that unit for the purpose of applying the provisions of the Act specified in the preamble of the subsection.
Subsection 259(3) of the Act provides that the period referred to in subsection 259(1) of the Act begins 15 months before the date the election is made (or such other later date as is specified in the election), and ends when the election is revoked (or such other date as is specified in the revocation that is within the 15 month period that precede the date of the notice). In the case at hand, none of the elections were revoked and all elections requested the earliest starting date.
Paragraph 259(1)(a) of the Act provides that the taxpayers specified shall be deemed not to acquire, hold or dispose of any units of a fund that the taxpayers have in fact acquired, held or disposed of, as the case may be, at a particular time within the period covered by the election. However, it must be noted, that while the provision refers to a unit held at a particular time within the period, it does not provide any directions as to how the acquisition or disposition of such a unit must be treated if it is acquired before or after the period. Accordingly, if an election is made by a trust for a period and a unit of the trust is acquired by a specified investor before the start of the period, the unit will be deemed not to have been held during the period or disposed of during the period (if, in fact, it is disposed of during the period) but, the election will not have any application to treat the acquisition of the unit as an acquisition of a proportionate interest in the property of the trust represented by that unit. This factor may lead to some unusual results and is probably the basis of XXXXXXXXXX concerns with the application of section 259 to DPSPs.
The results that can arise from the application of section 259 to various trusts in this situation are too complex to fully review in this memorandum. However, an example of the unusual implications that can arise can be found in the interaction of the election with subsections 146(10) (10.1) and (6) of the Act and Part XI.1 of the Act. Subsection 146(10) operates to include the fair market value of any non-qualified investment of an RRSP in the income of an RRSP annuitant when the RRSP acquires the non-qualified investment. Subsection 146(6) then allows the annuitant a deduction when the RRSP disposes of the non-qualified investment equal to the lesser of the amount included in the annuitant's income and the proceeds of disposition of the property. At the same time, subsection 146(10.1) operates to tax the RRSP on any income earned by the RRSP from non-qualified investments held. Finally, subsection 207.1(1) of Part XI.1 of the Act assesses a monthly tax equal to 1% of the fair market value, at the time of acquisition, of any non-qualified investment of the RRSP held at the end of each month. However it does not apply this tax on any property the value of which was included in the annuitants income under subsection 146(10) of the Act.
If a unit of a qualified trust is a non-qualified investment for an RRSP at the time of its acquisition and it is acquired by the RRSP before the start of a section 259 election period, the provisions of subsection 146(10) will apply to include the fair market value of the unit into the RRSP annuitants income. The election will have no application to the acquisition. However, if the units are disposed of within the period, the dispositions will be deemed to not have occurred at that time so subsection 146(6) will not be applicable and nothing in the Act will apply to cause a disposition at a later date. In the result, the taxpayer will be assessed an unrecoverable tax. The only way to prevent this would be to revoke the election with the period ending prior to disposal of the units.
The election will also have application to the holding of the units in the election period so subsection 146(10.1) will not apply during the period to the units.
Similar provisions to those for RRSPs are applicable to RRIFs, RIs and DPSPs while other rules for RIs may jeopardize the RIs registered status. Accordingly, the consequences of making an election for a qualified trust whose units are already held as non-qualified investments for such plans will be complex. Furthermore, it must be noted that there will be significant problems with the application of the various provisions to the group RRSP involved. The rules that are applicable to RRSPs were written for RRSPs with one annuitant and since group RRSPs were an administrative creation, the determination of benefits for each annuitant will also require administrative solutions. Each case will require a detailed examination to determine the implications of making/accepting an election or not making/rejecting an application.
In the case at hand, a very significant portion of each trust's units were acquired before the effective date of the elections. Accordingly, if the elections are valid, they will have limited application to any assessments under 146(10) or Part X of the Act. Furthermore, the investors will not be able to recover any taxes in respect of these provisions from the disposition of the units if the dispositions are made within the election periods.
With respect to acquisitions of units made in the elective period, we have not been provided with enough information to clearly establish the extent to which each investor in each trust will be exposed to taxation for holding non-qualified investments. Therefore, we can not provide any comments on this issue.
D.Is there a foreign property limits concern?
XXXXXXXXXX has noted, in their submission, that several investors will exceed their foreign property limits if the elections are valid. Similarly a number of investors may be subject to excess foreign property holdings if the elections are not valid. Section 206(1)(i) of the Act provides that an interest in a trust is a foreign property unless it is a registered investment or is excepted by Regulation. The trusts in question are not registered investments and we have not been advised that they are excepted from the provision in accordance with Regulation 5000 as pooled fund trusts.
It should also be noted that the tax payable under subsection 206(2) of the Act does not apply to property that is not a qualified investment to certain specified investors. Accordingly an RRSP, DPSP or RRIF will not be assessed a tax on holding non-qualified investments as well as a tax for holding excess foreign property in respect of the same property. However, this limitation does not apply to an RI.
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995