16 January 2012 External T.I. 2012-0432611E5 - Swap Transactions in RRSPs and RRIFs

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: Does the 2011 federal budget effectively prohibit all swap transactions in RRSPs and RRIFs?

Position: Yes, subject to limited exceptions.

Reasons: The amendments in Bill C-13 (which received royal assent on December 15, 2011) extend the existing TFSA rules for swap transactions in Part XI.01 of the Act to RRSPs and RRIFs. These rules eliminate all current and future benefits associated with swap transactions, regardless of whether the transaction occurs at fair market value. This serves, in effect, as a prohibition on swap transactions. Position is consistent with statement in Department of Finance News Release dated October 16, 2009, which first introduced prohibition on swap transactions for TFSAs.

XXXXXXXXXX 				2010 043261
					Jason R. Ward
January 16, 2012

Dear XXXXXXXXXX :

Re: Swap transactions in RRSPs and RRIFs

This is in response to your email of January 8, 2012, concerning the new prohibition on swap transactions in registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs).

Although this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions, we are pleased to provide the following general comments.

The Income Tax Act was recently amended to implement a number of anti-avoidance rules for RRSPs and RRIFs, which were announced in the 2011 federal budget, as updated on June 6, 2011. The existing rules that effectively prohibit swap transactions between tax-free savings accounts (TFSAs) and other accounts were extended to RRSPs and RRIFs as of July 1, 2011.

Before this measure, swap transactions could potentially be used in attempts to shift value either out of or into an RRSP or RRIF, thereby inappropriately avoiding income inclusions on withdrawal or the limits on RRSP contributions. The new rules now strongly discourage taxpayers from undertaking any swap transaction with their RRSP or RRIF by eliminating all current and future benefits associated with the transaction.

Under section 207.05 of the Act, a special tax applies if an advantage is provided to:

• the annuitant or holder of an RRSP, RRIF, or TFSA;
• the registered plan itself; or
• any other person not dealing at arm's length with the annuitant or holder.

The tax is generally equal to the fair market value (FMV) of the advantage and is payable by the annuitant or holder of the registered plan, unless the advantage was extended by the issuer or carrier of the registered plan (or non-arm's length person), in which case the tax is payable by the issuer or carrier.

A swap transaction is expressly included in the list of transactions that are treated as an advantage under these rules. For this purpose, a swap transaction is any transfer of property between a registered plan and the annuitant or holder of the registered plan or non-arm's length person, subject to certain exceptions. Contributions, distributions, and purchase and sale transactions between an individual's two plans with the same tax attributes (for example, TFSA to TFSA or RRSP to RRSP/RRIF) are not treated as swap transactions.

An exception allows the annuitant or holder of the registered plan to swap out a non-qualified investment or prohibited investment in circumstances involving actions or events outside of his or her control. In addition, swap transactions that are undertaken to remove an investment from an RRSP or RRIF that would otherwise result in adverse tax consequences under the other budget measures are permitted to continue to occur until the end of 2021.

An advantage is defined to include any increase in the total FMV of property held in connection with a registered plan that can reasonably be considered to be attributable, directly or indirectly, to a swap transaction. The fact that the initial swap transaction may have occurred at the FMV is not relevant. The words "directly or indirectly" in the definition above encompass not only the increase in the FMV of the registered plan resulting from the swap transaction (if any), but also all future increases in the FMV which are reasonably attributable to the initial swap transaction. For example, any dividends, interest, or other amounts paid on the swapped security, any appreciation in value on the swapped security or on any substituted property (whether realized or not), and any income earned on income are subject to the advantage tax. As the advantage tax must be remitted annually, it is necessary to determine the total increases in the FMV annually. The Minister of National Revenue has discretion to waive all or part of the advantage tax in appropriate circumstances.

Since this tax treatment serves, in effect, as a prohibition on swap transactions, the Canada Revenue Agency expects that RRSP issuers and RRIF carriers will stop processing swap transactions, as was generally the case when these rules were first introduced for TFSAs in October 2009.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch