22 January 2018 Internal T.I. 2017-0727421I7 - Whether a TFSA account may be subject to setoff

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: Whether certain rights for an issuer as part of an arrangement can qualify under the conditions in subsection 146.2(2) such that the arrangement can be a TFSA.

Position: No.

Reasons: The rights in the particular arrangement cause the account to be maintained other than for the "exclusive benefit" of the holder and provide rights as to amount and timing of distributions to someone other than the issuer or the holder.

							January 22, 2018

Registered Plans Directorate
320 Queen Street, Tower A			Income Tax Rulings
Ottawa ON  K1A 0L5				  Directorate
F. Kravetz

Attention: Jean-François Lavallée

							2017-072742

RE: Whether an arrangement giving rights of setoff to the issuer can qualify as a TFSA

We are writing in response to your email dated October 23, 2017 in which you asked for our views on the acceptability of terms of a proposed TFSA specimen plan that give the issuer the right to apply a positive balance from the account to satisfy any debts owing by the holder of the arrangement to the issuer or any of its affiliates. In particular, you ask whether such terms comply with the conditions in paragraphs 146.2(2)(a) and (b) (footnote 1) and, if not, whether the exception in subsections 146.2(3) and (4) applies. The arrangement is in the form of a deposit with a bank.

Our comments

The definition of qualifying arrangement in subsection 146.2(1) (in conjunction with subsection 146.2(5)) requires that a TFSA comply with the conditions set out in subsection 146.2(2) at all times. Of relevance to your query are the conditions in paragraphs (a) and (b):

(a) the arrangement requires that it be maintained for the exclusive benefit of the holder (determined without regard to any right of a person to receive a payment out of or under the arrangement only on or after the death of the holder);

(b) the arrangement prohibits, while there is a holder of the arrangement, anyone that is neither the holder nor the issuer of the arrangement from having rights under the arrangement relating to the amount and timing of distributions and the investing of funds;

Subsections 146.2(3) and (4) provide that these conditions do not apply to prevent the holder of a TFSA from using his or her interest in the TFSA as security for a loan or other indebtedness, subject to certain anti-avoidance rules that are not relevant to the query.

Unless otherwise qualified, the term benefit has a broad meaning for the purposes of the Act and can encompass nearly any advantage available. Given that the proposed TFSA terms give the issuer the right to use a positive balance in the account to satisfy debts of the holder to it or its affiliates without notice, the arrangement benefits the issuer and its affiliates. Therefore, the arrangement cannot be said to be exclusively benefiting the holder and falls offside of the condition in paragraph 146.2(2)(a). Further, by allowing a positive balance to be applied to a debt owing to the issuer’s affiliates, the arrangement gives rights relating to amounts and timing of distributions to someone other than the holder or issuer and thus offends the condition in paragraph 146.2(2)(b).

The terms are not saved from offending the conditions in paragraphs 146.2(2)(a) and (b) by subsections 146.2(3) and (4) because the right of setoff does not confer a property interest on the issuer or its affiliates and so does not rise to the level of security.

Therefore, the terms of the proposed TFSA specimen plan are not acceptable under section 146.2 such that any arrangements issued under the plan would not qualify as a TFSA.

Please note that we have not considered the effect of other potential rights of setoff or rights of combination on the qualification of an account as a TFSA. However, based on our analysis, although it will always be a question of fact, it is likely that most rights of setoff that are expressly contained in an account agreement would fall offside of the TFSA rules.

We trust these comments will be of assistance.

Yours truly,

Dave Wurtele
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c. XXXXXXXXXX, Department of Finance Canada

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 All statutory references herein are to the Income Tax Act (the “Act”).