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: [TaxInterpretations translation] Is it possible to swap, without tax consequences, an investment held in a non-registered account with an investment held in an RRSP?
Reasons: 207.01(1) and 207.05. The swap is covered by the concept of advantage.
Notary, M. Fisc.
February 14, 2012
Subject: Registered Retirement Savings Plan ("RRSP")
This is in response to your e-mail of August 8, 2011 in which you asked us for information about the possibility of swapping a savings bond held in an RRSP and a savings bond held in a non-registered account.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act") as amended by Statutes of Canada 2011, c.24: An Act to implement certain provisions of the 2011 budget as updated on June 6, 2011 and other measures.
The 2011 federal budget (updated, June 6, 2011) introduced a number of anti-avoidance rules. Those rules, which were already applicable to tax-free savings accounts ("TFSAs"), are now applicable to RRSPs and registered retirement income funds ("RRIFs"). These include the advantage rules, the prohibited investment rules and the qualified investment rules. The advantage rules relate to the situation you have described to us.
Under section 207.05, a tax is payable for a calendar year if an advantage in relation to a registered plan is extended to any of the following persons:
- the holder of a TFSA
- the annuitant of an RRSP or RRIF,
- a trust governed by a TFSA, RRSP or RRIF,
- any other person not dealing at arm's length with the holder or annuitant, or is received or receivable by them.
The tax payable generally corresponds to the fair market value ("FMV") of the benefit.
The concept of "advantage" is defined in subsection 207.01(1) and specifies inter alia a benefit that is an increase in the total fair market value of the property held in connection with the plan 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 expression "swap transaction" is defined in subsection 207.01(1) and includes, with respect to an RRSP, a transfer of property made after June 30, 2011 between the RRSP and its annuitant or a person with whom the annuitant does not deal at arm’s length (footnote 1). Paragraphs (a) to (d) of this definition set out some situations that do not constitute a "swap transaction".
Consequently, under the definition of advantage, any increase in the FMV of property held in an RRSP that is reasonably considered, in the circumstances, to be attributable, directly or indirectly, to a swap transaction is considered an advantage that is subject to tax. In that regard, the fact that the swap transaction is conducted at FMV is not relevant. The expression, directly or indirectly, used in the definition of advantage, includes (as applicable) any immediate increase in the FMV of the RRSP resulting from the swap transaction, as well as any increase in the FMV of the RRSP that it is possible to attribute to the initial swap transaction. For example, tax in respect of an advantage includes inter alia;
- any dividend, interest or other amount attributable to the swapped property,
- any increase in value of the swapped property or property that replaces the swapped property (regardless of whether or not the increase was realized),
- any income earned on income.
The tax respecting an advantage must be paid on an annual basis. It is therefore necessary to annually calculate the increase in the FMV of the RRSP resulting from an advantage.
In addition, an amount arising from “an RRSP strip in respect of the registered plan" will also be considered an advantage. The concept of an "RRSP strip" is also defined in subsection 207.01(1) and refers, in respect of an RRSP, to an amount used or obtained by the RRSP annuitant, or by a person with whom the RRSP annuitant does not deal at arm's length, as part of a transaction or event or a series of transactions or events one of the main purposes of which is to enable the annuitant, or a person with whom the annuitant does not deal at arm's length, to use or obtain the benefit of property held in connection with the RRSP. Paragraphs (a) to (d) of that definition set out a number of situations that do not constitute an "RRSP strip". That rule is effective March 23, 2011.
Therefore, a swap transaction that results in the reduction of an RRSP balance is considered an advantage under the definition of an "RRSP strip".
Based on the information you submitted to us, the transaction you would like to effect between your RRSP account and your non-registered account would be subject to the concept of advantage either as a swap transaction or as an RRSP strip. Proceeding with this transaction could have negative tax consequences.
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
for the Director
Financial Industries 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 For more information on the concept of non-arm's length, see Interpretation Bulletin IT-419R2, Meaning of Arm's Length, available on the CRA's Web site as follows: http://www.cra-arc.gc.ca/E/pub/tp/it419r2/it419r2-04e.pdf
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