18 June 2010 External T.I. 2009-0348901E5 - RESP swap

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: Can an individual swap securities between their RESP and non-registered investment account?

Position: Yes. Unlike TFSAs, there are no specific restrictions on swap transactions in RESPs.

Reasons: The individual is considered to have disposed of the securities for proceeds of disposition equal to their FMV at the time of the transaction and the RESP trust is considered to have acquired the securities at a cost equal to their FMV at that time. Any taxable capital gain arising on the disposition must be included in the individual's income. However, any capital loss would likely be denied as a superficial loss.

XXXXXXXXXX 								2009-034890
									K. Hooey

June 18, 2010

Dear XXXXXXXXXX :

Re: SWAP between RESP and Non-Registered Account

This is in reply to your e-mail of November 23, 2009 in which you asked whether an individual can swap securities between their registered education savings plan ("RESP") and non-registered investment account.

Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate 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.

What is commonly referred to as a "swap" in the context of registered retirement savings plans and other registered plans is a transfer of securities for cash or other securities of equal value between the registered plan and non-registered investment account. Unlike the proposed restrictions for tax-free savings accounts, the Income Tax Act (the "Act") does not contain any specific restrictions on swap transactions between RESPs and non-registered accounts. The tax consequences for swap transactions are discussed below.

We caution against transferring property to an RESP trust that is not a "qualified investment" as defined in subsection 146.1(1) of 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.

Where an 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 our comments are of assistance to you.

Yours truly,

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