15 June 2010 External T.I. 2010-0352921E5 - Transfer of securities into an RESP

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: (1) Is a taxpayer required to report a capital gain incurred on a transfer of securities into a Registered Education Savings Plan ("RESP")? (2) Can a taxpayer report a capital loss incurred on a transfer of securities into an RESP?

Position: Any taxable capital gain arising on the disposition of securities to an RESP trust is required to be included in computing income. Any resultant capital loss, however, is deemed to be nil for tax purposes to the extent that it is a "superficial loss".

Reasons: Both an in-kind contribution of securities to an RESP trust and an exchange of securities for cash or other securities of equal value held by the RESP trust (i.e., a "swap") are considered a "disposition" as defined in 248(1); the proceeds of disposition of the securities is equal to their fair market value at the time of their disposition.

XXXXXXXXXX
									2010-035292
									Jason R. Ward
									(613) 957-9769
June 15, 2010 

Dear XXXXXXXXXX :

Re: Registered Education Savings Plan (RESP)

This is in reply to your email of December 28, 2009 in which you requested our comments on the tax consequences to an individual who transfers securities owned directly by the individual to a trust governed by an RESP ("RESP trust") under which the individual is the subscriber. More specifically, you have inquired (1) if the individual must report a capital gain when the securities are transferred to the RESP trust at a gain, and (2) whether the individual may claim a capital loss when the securities are transferred to the RESP trust at a loss.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

It was not clear from your email the manner in which the securities are proposed to be transferred to the RESP. Generally, this can be accomplished in one of two ways, either as an in-kind contribution of the securities by the individual to the RESP or by exchanging the securities for cash or other securities of equal value held by the RESP trust, commonly referred to as a "swap". The tax consequences of both types of transfers are discussed below.

In either case, we caution against transferring property to an RESP trust that is not a "qualified investment" as defined in subsection 146.1(1) of the Income Tax Act (the "Act") in order to avoid unintended tax consequences, including possible revocation of the RESP pursuant to subsection 146.1(2.1) of the Act. Further comments on qualified investments and the income tax implications inherent in an RESP trust holding non-qualified investments are contained in Interpretation Bulletin IT-320R3.

An in-kind contribution of securities by an individual to an RESP trust is considered a disposition of the securities for the purposes of the Act. The individual's proceeds of disposition of the securities transferred to the RESP trust are equal to their fair market value at the time they are transferred to the trust. Similarly, for the purposes of sections 146.1 and 204.9 of the Act, the individual will be considered to have made a contribution to the RESP trust in an amount equal to the fair market value of the securities at the time they are transferred to the trust.

Where the individual exchanges securities held in their non-registered account for cash or other securities of equal value held by the RESP trust, the exchange will generally be viewed as a purchase and sale, and not a withdrawal and re-contribution. The individual would be considered to have disposed of the securities for proceeds equal to their fair market value at the time of the transaction and the RESP trust would be considered to have acquired the securities at a cost equal to that value. We note that where the transactions are not at fair market value there may be adverse tax consequences to the individual and the RESP trust, as well as implications under the Canada Education Savings Act.

Any taxable capital gain arising on the disposition of securities to an RESP trust is required to be included in computing income. Any resultant capital loss, however, is deemed to be nil for tax purposes to the extent that it is a "superficial loss".

The term "superficial loss" is defined in section 54 of Act to be essentially, a loss from the disposition of a property where the taxpayer or an affiliated person acquires the property or an identical property within the period that begins 30 days before and ends 30 days after the disposition, and still owns it at the end of that period.

The individual will be affiliated with the RESP trust if either the individual or the individual's spouse or common-law partner is a majority-interest beneficiary of the RESP trust, as defined in subsection 251.1(3) of the Act. Whether the individual is a majority-interest beneficiary of the RESP trust is a question of fact that can only be determined after analyzing all the facts and circumstances, including the arrangement entered into between the individual and the promoter of the RESP. In most cases, however, we would expect that an RESP trust will be affiliated with the subscriber under the plan, given the rights that subscribers typically have under RESPs (i.e., the right to receive a refund of payments and the contingent right to receive an accumulated income payment).

We trust that these comments will be of assistance.

Yours truly,

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