Section 146.2

Old Paragraph 146.2(1)(c)

See Also

Dep. MNR v. Bonair Leisure Industries Ltd., 82 DTC 6217, [1982] CTC 188 (FCA)

It was stated respecting the use of the word "homes" in the Excise Tax Act: "The word is not qualified by any adjective. There is thus no reason for not according it the fullest or broadest meaning it may bear that is consistent with the context in which it is found".

Subsection 146.2(2) - Qualifying arrangement conditions

Paragraph 146.2(2)(a)

Administrative Policy

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

a set-off right of an issuer of a TFSA violated the exclusive holder benefit rule

Does a TFSA specimen plan (respecting a deposit with a bank) that give the issuer the right to apply a positive balance from the account to satisfy any debts owing by the holder to the issuer or any of its affiliates comply with the conditions in ss. 146.2(2)(a) and (b). After noting that this “arrangement benefits the issuer and its affiliates,” and before concluding that “the plan would not qualify as a TFSA,” CRA stated:

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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146.2 - Subsection 146.2(4) most express rights of set-off put the TFSA offside 193

27 June 2017 External T.I. 2017-0708951E5 F - TSFA - Conditions

negative covenant in favour of lender to TFSA holder permitted

After noting that, notwithstanding the conditions in s. 146.2(2), the TFSA holder may use the holder’s interest in a TFSA as security for a loan if the s. 146.2(4)(a) and (b) conditions are satisfied, CRA appeared to countenance a negative covenant inserted in the TFSA declaration requiring that the TFSA maintain a minimum asset level.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146.2 - Subsection 146.2(4) (apparently permitted) covenant in TFSA declaration requiring asset minimum to support loan to holder 161

Paragraph 146.2(2)(c)

Administrative Policy

20 August 2018 External T.I. 2017-0731541E5 - TFSA contributions

taxable employer contribution to employee’s TFSA not subject to s. 146.2(2)(c)

CRA indicated where an employee has an enforceable right (outside the context of a group TFSA arrangement) to receive an amount from the employer (for example, as remuneration for services rendered), but directs the employer to make the payment to the employee’s TFSA, this will constitute a contribution made to the TFSA by its holder of the TFSA and, therefore, complies with the s. 146.2(2)(c) requirement. The applicable reporting and withholding requirements would apply if the payment constitutes employment.

20 August 2018 External T.I. 2018-0739761E5 - TFSA contributions

remuneration or a trust distribution paid directly to a TFSA is not a 3rd-party contribution

CRA indicated that each of the following payments constitutes a contribution made to a TFSA by its holder and, therefore, complies with s. 146.2(2)(c):

  • The holder uses a monetary gift received from another individual to make the contribution.
  • The holder’s employer makes payments under a group TFSA arrangement on behalf of each participating employee, including the holder, to the employee’s individual TFSA with the employee’s concurrence and with the amount reported on the T4 slip as employment income.
  • The holder is a beneficiary of a personal trust who, as authorized by the terms of the trust, directs that a distribution from the trust be made directly to the holder's TFSA.
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage the payment of remuneration or a trust distribution directly to a TFSA is not an advantage 111

Paragraph 146.2(2)(e)

Articles

Max Reed, "TFSA: US Tax Classification", Canadian Tax Highlights, Vol. 22, No. 7, July 214, p. 5

TFSA not a trust for Code purposes (p.6)

[I]f an entity is separate from its owner, it is subject to the entity classification regime unless it is specifically classified in the Code or regulations; the TFSA is not. A TFSA also does not meet the definition of a trust for US tax purposes. A foreign trust is defined in Code section 7701(a)(31)(B) as any trust that is not domestic. A trust is defined in regulation 301.7701-4(a) as an arrangement in which the trustee "take[s] title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts." A bank does not take title to property deposited into a TFSA. A statutory precondition to the establishment of a TFSA (ITA paragraph l46.2(2)(e)) is that at the customer's direction the financial institution "shall transfer all or any part of the property held in connection with the arrangement (or an amount equal to its value) to another TFSA of the holder," a right that assumes that the customer retains title to the property. ...

Default classification as disregarded entity (p. 6)

In summary, the precise classification of a TFSA is not certain, but a TFSA is not a foreign trust because it is not an entity separate from its owner; thus, the entity classification rules do not apply and no special reporting of the TFSA is required. Even if the entity classification rules apply, the default classification of a TFSA is that of a disregarded entity for US tax purposes, and a form 8858 must be filed annually.

Paragraph 146.2(2)(f)

Administrative Policy

22 October 2015 Internal T.I. 2013-0486491I7 - Overdrafts in a TFSA

administrative accommodation of short term inadvertent overdrafts but not of cashless warrant exercise

A short-term overdraft in a TFSA may arise, for example, as a result of a settlement mismatch (e.g. a security sold with three-day settlement and a purchase with same-day settlement, a trading error, funding of a purchase with an NSF cheque, a client-initiated purchase with insufficient funds or fees exceeding available balances. CRA stated:

It is clear that monies were provided to the TFSA trust in order to complete the payment out of the TFSA trust thereby creating a lender/borrower relationship. … As a result, the TFSA trust would be considered to have borrowed money”.

… However, where an overdraft is created in respect of fees charged to the TFSA but which remain unpaid… [this] would not constitute borrowing of money or other property for the purposes of paragraph 146.2(2)(f). …

Turning to the cashless exercise of warrants, CRA stated:

[T]he broker advanced the funds to the TFSA trust necessary to exercise the warrants in question. The broker, acting as an agent of the TFSA trust, exercised the warrants, obtained the underlying shares, and then sold the shares to a third party. Using the sale proceeds, the broker recovered their portion of monies used to exercise the warrants plus any fees or charges and provided the remaining monies to the TFSA trust.

…[T]his is a form of buying on margin which clearly involves a lender/borrower relationship and therefore would be considered borrowing money.

Respecting administrative accommodation, CRA stated:

The CRA will not apply paragraph 146.2(5)(c) to an overdraft in a TFSA if it:

  • is temporary in nature and covered without undue delay;
  • arises as a result of (i) a mismatch of cash flow due to differences in standard settlement cycles for securities, (ii) a reasonable error, or (iii) an unintended infrequent event; and
  • does not have the character of leveraged investing.

This… is intended to accommodate certain overdrafts of very short duration that are quickly or naturally reversed or that are infrequent and inadvertent…[and] does not apply to borrowing… in connection with a cashless exercise of warrants... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Unused TFSA Contribution Room deemed proceeds under s. 146.2(8) are not a distribution 139
Tax Topics - Income Tax Act - Section 146 - Subsection 146(6) - Paragraph 146(4)(a) accommodation only of temporary technical breach of borrowing prohibition for registered plans 218

Subsection 146.2(4)

Administrative Policy

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

most express rights of set-off put the TFSA offside

Does a TFSA specimen plan (respecting a deposit with a bank) that give the issuer the right to apply a positive balance from the account to satisfy any debts owing by the holder to the issuer or any of its affiliates comply with the conditions in ss. 146.2(2)(a) and (b) and, if not, would the ss. 146.2(3) and (4) exceptions apply? After noting that this “arrangement benefits the issuer and its affiliates,” and before concluding that “the plan would not qualify as a TFSA,” CRA indicated that, respecting s. 146.2 (2)(a), “arrangement benefits the issuer and its affiliates,” so that it was not for the exclusive benefit of the TFSA holder. S. 146.2 (2)(b) was not complied with because the issuer’s affiliate had set-off rights. CRA then stated:

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.

…[I]t is likely that most rights of setoff that are expressly contained in an account agreement would fall offside of the TFSA rules.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146.2 - Subsection 146.2(2) - Paragraph 146.2(2)(a) a set-off right of an issuer of a TFSA violated the exclusive holder benefit rule 141

27 June 2017 External T.I. 2017-0708951E5 F - TSFA - Conditions

(apparently permitted) covenant in TFSA declaration requiring asset minimum to support loan to holder

An uncle funds his nephew’s contribution to his TFSA with a loan bearing interest at 3%. The TFSA contract requires the maintenance of an asset minimum (described as a “margin call provision … “in order to secure the loan”), i.e., so that the nephew cannot liquidate the TFSA unbeknownst to his uncle. Is this permitted?

After noting that, notwithstanding the conditions in s. 146.2(2), the holder may use the holder’s interest in a TFSA as security for a loan if the s. 146.2(4)(a) and (b) conditions are satisfied, CRA stated:

Thus, it is possible for an individual to borrow to contribute to his or her TFSA. The loan is a separate contract from the TFSA arrangement. However, subject to the above-mentioned requirements with respect to the right of a holder to use its interest in a TFSA as security, the terms and conditions of such borrowing are established between the individual and the lender and not by virtue of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 146.2 - Subsection 146.2(2) - Paragraph 146.2(2)(a) negative covenant in favour of lender to TFSA holder permitted 55

28 August 2015 External T.I. 2013-0514261E5 - Using the Assets of a TFSA as Security for a Loan

assets of TFSA trust may not be used as security

May the underlying assets of a TFSA trust be used by the TFSA holder as security for a loan or other indebtedness? CRA responded:

When the TFSA is an arrangement in trust subsection 146.2(4) would not permit the underlying assets of the TFSA to be used by the TFSA holder as security for a loan or other indebtedness.

Subsection 146.2(5)

Paragraph 146.2(5)(c)

Administrative Policy

26 February 2015 External T.I. 2015-0569601E5 F - Contribution to a TFSA

direct contribution to spouse’s TFSA ends its status/gift to fund spousal contribution acceptable

Respecting a submitted factual situation where it was unclear whether the taxpayer had gifted money to his spouse with the funds being contributed by her to her TFSA, or whether he had made a direct contribution to her TFSA, CRA stated:

Paragraph 146.2(2)(c) provides that only the holder of a TFSA can contribute to the TFSA. Where a person makes a gift to his or her spouse and the spouse uses the gift to make a contribution to the TFSA of which the spouse is a beneficiary, the Canada Revenue Agency is of the view that it is the holder of the TFSA who has made the contribution. … If the facts surrounding the transaction demonstrate that a person has contributed to his spouse's TFSA, paragraph 146.2(2 (c) would not be complied with and, pursuant to paragraph 146.2(5)(b), the TFSA would cease to be a qualifying arrangement.

Subsection 146.2(6) - Trust not taxable

Administrative Policy

22 March 2018 Internal T.I. 2018-0738201I7 - Residency of TFSA trust

investment trading decisions by non-resdient holder did not make the TFSA trust a non-resident

CRA considered that because the trust company trustee of a TFSA, RRSP, RRIF, RESP or RDSP is required under the Act “to maintain and exercise key decision-making powers and responsibilities over the trust” (e.g., ensuring compliance with ITA requirements including monitoring for non-qualified investments and ensuring that all transactions occurred at fair market value), it follows that such trusts will have their central management and control in Canada, so that they “will always be considered resident in Canada.” Thus, the non-resident holder of a self-directed TFSA was unsuccessful in her arguments that the trust was resident outside Canada based on her making the investment decisions.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 2 - Subsection 2(1) all self-directed RRSPs and TFSAs are resident in Canada 156

13 June 2017 STEP Roundtable Q. 13, 2017-0693341C6 - TFSA Audit Project

general principles apply for determining whether TFSA trading is a business

S. 146.2(6) provides that if a TFSA “carries on one or more businesses” then Part I tax is payable on its business income. What guidance is there respecting where taxpayers actively trade securities in their TFSA?

After noting that CRA has reassessed more than $75 million in additional taxes resulting from audits of TFSAs, CRA noted that, as indicated in S3-F10-C1, para. 1.87, “there is nothing unique in applying these general principles [set out in IT-479R] to securities trading that occurs within a registered plan.” Accordingly, CRA does not have any plan to provide any further guidance specific to TFSAs on this issue.

S3-F10-C1 - Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs

Option trading and short selling

1.90 As discussed in ¶1.41 and ¶1.46, where a registered plan engages in certain option writing strategies or foreign exchange trading, it may be considered to be carrying on a business. The same result may arise where a registered plan engages in short selling (which is where an investor sells property they do not own) or securities lending. Note that, because the restriction on borrowing for TFSAs (discussed in ¶1.83) applies to any property not just money, a short sale within a TFSA is effectively prohibited.

1.91 The decision in Prochuk v The Queen, 2014 TCC 17, 2014 DTC 1050 held that trading in a registered plan is not a relevant factor in determining whether a taxpayer is carrying on a trading business outside of the plan. This decision does not stand for the proposition that the trading of securities in a registered plan will not in any circumstance be considered to be carrying on a business by the plan.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 204 - qualified investment - (a) 208
Tax Topics - Income Tax Act - Section 262 113
Tax Topics - Income Tax Act - Section 204 - qualified investment - (d) 320
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(b) 256
Tax Topics - Income Tax Act - Section 204.4 - Subsection 204.4(1) 107
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(2) 52
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j) 149
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j.1) 53
Tax Topics - Income Tax Act - Section 204 - qualified investment - (b) 55
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(e) 173
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) 69
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(u) 80
Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(v) 50
Tax Topics - Income Tax Regulations - Regulation 4901 - Subsection (1) - Specified small business corporation 38
Tax Topics - Income Tax Regulations - Regulation 5100 - Eligible Corporation 44
Tax Topics - Income Tax Act - Section 207.04 - Subsection 207.04(4) 82
Tax Topics - Income Tax Act - Section 146 - Subsection 146(10.1) 90
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(6) 110
Tax Topics - Income Tax Act - Section 146 - Subsection 146(4) - Paragraph 146(4)(a) 118
Tax Topics - Income Tax Act - Section 146 - Subsection 146(4) - Paragraph 146(4)(b) 94

Articles

Arthur B.C. Drache, "TFSAs as a Business", The Canadian Taxpayer, January 2, 2015 – Vol. xxxvii No. 1, p. 5.

TFSA audit project (p.5)

Sources from the tax and legal sectors of the CRA have apparently confirmed to the Financial Post that the CRA has rolled out a TFSA audit project that has become increasingly active in the past couple of years….

Impending litigation re TFSA day trading

(p.5)

Now a Calgary law firm says it is readying for a legal fight with Ottawa. As quoted in the Financial Post:

"There are a lot of people, day traders, with online brokerage accounts and they sit and buy and sell securities. Maybe 10 to 15 trades a day," says Tim Clarke, a lawyer with Calgary's Moodys Gartner Tax Law LLP, which is preparing to challenge the tax agency's interpretation. "The CRA says that means you are trader in securities and you are carrying on a business."

…"There is no case law on this business of carrying on a business in a TFSA," said Lauchlin MacEachern, another lawyer with Moodys Gartner, who says he can't comment on specific cases. "In the next year or two we expect there to be a case that goes to court and we'll know whether carrying on a business in your TFSA means trading securities actively. We say that's a question of fact and we also disagree with their legal interpretation."