Subsection 207.01(1) - Definitions
Advantage
Administrative Policy
20 August 2018 External T.I. 2018-0739761E5 - TFSA contributions
CRA indicated that each of the following payments made to a TFSA would not, in and of itself, constitute an advantage:
- The TFSA 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 146.2 - Subsection 146.2(2) - Paragraph 146.2(2)(c) | remuneration or a trust distribution paid directly to a TFSA is not a 3rd-party contribution | 113 |
28 May 2015 External T.I. 2015-0574481E5 - Advantage tax and employee-owned securities
Have the views expressed in 2009-0320311I7 and 2009-0323391R3 changed in light of the amendment to s. (b)(i) of the definition of "advantage" that replaced the language "open market" with "normal commercial or investment context"? CRA responded:
it remains our position that the transactions that were the subject of the above-referenced files (also discussed in [ITTN, No. 44]) would give rise to an advantage under the amended language. …
…This is consistent with the June 6, 2012 comfort letter from the Department of Finance…[which] confirmed that the amendment was not intended to accommodate estate freeze transactions.
May 2013 ICAA Roundtable, Q. 10 (reported in April 2014 Member Advisory)
What criteria apply in determining whether a transaction or event or a series of transactions or events involving a TFSA would not have occurred in an open market in which parties deal with each other at arm's length and act prudently, knowledgeably and willingly? CRA responded:
The determination of whether a transaction or event or a series of transactions or events would not have occurred in an open market in which parties deal with each other at arms-length and act prudently, knowledgeably and willingly is a question of fact… . It is the CRA's position that a TFSA trust and its holder do not deal at arm's length. Consequently, transactions between a TFSA and an RRSP held by the same holder, directly or indirectly through a third party, to consistently realize losses in the RRSP and gains within the TFSA is indicative of a non-arm's length situation.
28 May 2014 External T.I. 2013-0486111E5 F - RRSP, prohibited investment
The shares of an RRSP, which were prohibited investments held by it on 23 March 2011 and for which it made the transitional benefit election in s. 207.05(4), were subsequently exchanged under s. 51 for shares which were not prohibited investments as defined in s. 207.01(1). CRA stated (TaxInterpretations translation):
Since there is no disposition [under s. 51], the exchange does not produce a benefit which is income or a capital gain. Consequently, no advantage is accorded on the RRSP as per paragraph (c) of the definition of advantage… .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(13) | s. 51 exchange of transitional prohibited property does not trigger s. 207.04(1) tax | 108 |
| Tax Topics - Income Tax Act - Section 207.05 - Subsection 207.05(4) | s. 207.05(4) status is preserved following s. 51 exchange | 108 |
6 June 2013 External T.I. 2012-0451801E5 F - deemed dividend, advantage
An RRSP which holds shares which became a prohibited investment on March 22, 2011, and which subsequently did not appreciate in value, subsequently realizes a deemed dividend on a redemption of those shares. In finding that such dividend is an advantage, CRA stated (TaxInterpretations translation):
A dividend received after March 22, 2011 that it is reasonable to attribute directly or indirectly to a prohibited investment is an advantage. The Act does not contemplate any relieving measure to permit such a dividend to be considered to be derived from value accumulated prior to March 23, 2011.
However, s. 207.05(4) may provide transitional relief.
ITTN No. 44 under "Key Employee Tax-Free Savings Account," 14 April 2011
After confirming the proposition posed that "where common shares of a company are issued to a tax-free savings account (TFSA) of a key employee as part of a freeze, the CRA considers the shares' FMV increase to be an "advantage" as defined in subsection 207.01(1) ...that is, a benefit taxable to the employee," CRA went on to state:
the words "directly or indirectly" in the definition encompass not only the increase in the FMV of the TFSA resulting from the share issuance, but also all future increases in FMV that are reasonably attributable to the initial advantage. These increases include, for example, any increase in FMV of the TFSA or any other TFSA of the holder that is reasonably attributable to any dividends paid on the shares, any capital appreciation in value on the shares or on any substituted property (whether realized or not), and any income earned on income. Because the advantage tax is required to be remitted annually, it would be necessary to determine the total increases in FMV annually.
27 May 2009 Internal T.I. 2009-0320311I7 F - CELI - Notion d'avantage
The sole shareholder (Mr. X) of Opco engages in an estate freeze as a result of which he holds all the preferred shares and 95% of the common shares of Opco and 5% of the common shares (assumed to be qualified investments and not prohibited investments) are issued to the TFSA of an unrelated key employee of Opco. CRA stated (TaxInterpretations translation):
[I]t appears that the shares of Opco subscribed for by the TFSA of the key employee were issued by Opco by reason of the employment relationship between Opco and the key employee. Therefore, the issuance of those shares would not have occurred in an open market between arm's-length parties acting prudently, knowledgeably, and willingly, and that one of the main purposes of that issuance was to permit among other things the key employee, the TFSA holder, to benefit from the tax-exempt status under Part I of the TFSA. In such a case, it would be reasonable to consider as an advantage any increase in the total FMV of the property of the TFSA which could be attributed, directly or indirectly, to the issuance of the shares of Opco to the TFSA of the key employee.
Articles
Maureen De Lisser, Janna Krieger, "Registered Savings Plans: Investing Without Penalty", Canadian Tax Journal, (2013) 61:3, 769-96.
Illustration of value shift from RRSP to TFSA (pp. 784-5)
The following example illustrates a swap transaction and an RRSP strip that these rules are intended to prevent.
Example 1
Sara is close to retirement and has $150,000 in her RRSP and $10,000 in her TFSA at the end of the prior year. In the current year, she contributes $5,000 to her TFSA and uses the funds to acquire 500 common shares of Pubco for $10 a share. A few months later, the price of one Pubco share increases to $13, and Sarah transfers the 500 shares in her TFSA for $6,500 cash from her RRSP. There is nothing offensive about this transaction since there is no change in the FMV of either the TFSA or the RRSP.
Now assume that a few weeks later, the price of the shares goes back down to $10 and Sarah transfers the shares back to her TFSA for $5,000 cash. Her TFSA now has an FMV of $16,500 ($10,000 + $5,000 contribution + $6,500 - $5,000) and her RRSP now has an FMV of $148,500 ($150,000 – $6,500 + $5,000). Sarah has shifted $1,500 in value from her RRSP to her TFSA, which she can receive tax-free when she withdraws the funds from her TFSA. Had Sarah withdrawn the same amount directly from her RRSP, she would have been subject to part I income tax.
If such a transfer were repeated over and over again, Sarah could take advantage of the volatility of the stock market to shift value from her RRSP to her TFSA, and withdraw the extra value in her TFSA on a tax-free basis. However, under the advantage tax rules, the increase in the FMV of the TFSA resulting from the swap and the decrease in the value of the RRSP (resulting in an RRSP strip) would both be subject to the 100 percent advantage tax. The double imposition of the tax penalizes Sarah for violating the contribution limit rules in respect of the amount shifted to her TFSA, and for avoiding part I tax on the value shifted out of her RRSP.
As indicated in the example, there is nothing offensive about simply swapping property in a TFSA for cash or other consideration of equal value in the holder's RRSP. It is the subsequent transaction that makes the first one offensive. Rather than simply targeting the second abusive transaction, the advantage tax will apply to any transfer of property from a TFSA to an RRSP or RRIF, or from an RRSP or RRIF to a TFSA. There is an expectation by the CRA that many RRSP issuers and RRIF carriers will simply stop processing swap transactions prohibited under the new rules. [fn 58: See CRA document no. 2012-04392611E5, October 16, 2012.]
Paragraph (a)
Administrative Policy
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
3.6 “Where a benefit or debt is connected in any way with the existence of a plan, it is considered to be conditional on the existence of the plan.”
Example 1
An individual’s RRSP buys mutual fund units that entitle him to rent rental properties of the fund at a 25% discount, thereby resulting in advantage tax equaling the discount amount.
1 June 2016 External T.I. 2015-0601211E5 - Mortgage loan from RRSP to make a shareholder loan
An individual, who is an RRSP annuitant, borrows the “Mortgage Loan” from the RRSP, with a principal residence mortgage granted in favour of the RRSP as security. The Mortgage Loan would be administered by an approved lender under the National Housing Act and would be insured as required by Reg. 4900(1)(j.1) by an approved private insurer. The Mortgage Loan proceeds would be used to make an interest-free shareholder loan to a corporation controlled by the individual.
After indicating that the Mortgage Loan would be a qualified investment under Reg. 4900(1)(j.1)(d), and that “the granting of the Mortgage Loan would be a benefit conditional on the existence of the subject RRSP,” so that “there would be an advantage” unless the s. (a)(ii) exception applied, CRA stated:
[T]he terms and conditions of a mortgage loan that satisfies the requirements of paragraph 4900(1)(j.1)… would, because of the underlying nature of [the mortgage insurance] requirements, usually be terms and conditions that persons dealing at arm’s length with each other would have entered into; therefore, in such a case, the exception provided by subparagraph (a)(ii) of the definition “advantage” would likely be met. However…a benefit conditional on the existence of the subject RRSP (and therefore an advantage under paragraph (a) of the definition of “advantage”) could arise…if, for example, there is a default by the borrower and he/she is enriched as a result of the default.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | money borrowed by individual from RRSP to make interest-free loan to corporation | 175 |
| Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j.1) | use of qualified mortgage loan proceeds of no import | 178 |
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Registered Plan Strip | 4900(1)(j.1) mortgage loan unlikely to be acquired at less than FMV | 217 |
27 January 2014 External T.I. 2013-0504191E5 F - RRSP, qualified investment
An RRSP annuitant uses, for no consideration, property of a corporation of which the RRSP holds shares. Is this an advantage? CRA responded that, in these circumstances “the annuitant receives a benefit which is conditional on the existence of the RRSP trust as provided in paragraph (a) of the definition of advantage,” and that “as provided in paragraph 207.05(2)(a) … where the advantage is a benefit, the tax payable in respect of that benefit is the fair market value of the benefit.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 4901 - Subsection 4901(2) - Specified small business corporation | general discussion of SSBC definition | 217 |
Subparagraph (a)(i)
Subparagraph (a)(ii)
Administrative Policy
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
3.9 An RRSP annuitant providing a letter of direction to collapse the plan and remit the proceeds to the lender on default would not render the (a)(ii) exception inapplicable provided the loan reflects arm’s-length terms.
3.10 The broader exception permitting TFSAs to be used as security does not apply to the other plans, so that the others may not be “used in any manner to secure or guarantee a loan or other debt resulting in financing terms that are more favourable than would otherwise be available in the absence of the arrangement” failing which the favourable terms would constitute an advantage.
3.11 If an RRSP or RRIF permits its property to be used as security for a loan, s. 146(10) or 146.3(7) would apply to require the FMV of the property so used to be included in the annuitant’s income. However, if these and the advantage rules were both found to apply, CRA would only apply the advantage rules.
Subparagraph (a)(v)
Administrative Policy
3 April 2020 External T.I. 2019-0830101E5 - “Advantage”: promotional incentive exception
Q.1 and Q.2
S. (a)(v) of the advantage definition, as paraphrased by CRA in Folio S3-F10-C3, excludes “a promotional incentive under a program offered to a broad class of persons in a normal commercial or investment context.” Can CRA provide guidance?
Q.3
All but Examples 3 of Examples 2 to 6 in the Folio involve incentives with a low monetary and relative value. Is the value of the incentive relative to the amount invested a major factor in determining if the incentive is excepted?
CRA responded:
Question 1 – Broad class of persons
The phrase “a broad class of persons” … would generally encompass a large group of persons dealing with a financial institution at arm’s length who have been offered the same incentive without regard to tax considerations or their other personal or financial circumstances.
… For example, an incentive offered by a financial institution to all clients who invest or maintain registered and non-registered accounts at a specific minimum dollar amount would generally be considered to be offered to a broad class of persons.
… [W]hether an incentive offered only to a “select group” of clients would qualify for the exception would depend on the size of the group relative to the financial institution’s client base as a whole as well as on the particular criteria used to select eligible investors. A recent example we considered not to be an advantage was an investment fee incentive offered only to members of a particular professional group and their immediate family members.
Question 2 – Commercially reasonable
In general terms, we consider reasonable incentive programs of the type frequently offered by financial institutions, such as moderate fee rebates or bonus interest payments, to be offered in a “normal commercial or investment context” in which parties deal with each other at arm’s length and act prudently, knowledgeably and willingly (described in this letter as commercially reasonable). …
[F]actors indicating that an incentive program is not commercially reasonable would include disproportionate benefits relative to investment size, parties acting in concert and other commercially unreasonable behaviour that suggests a main purpose of the arrangement is to allow the investor to benefit from the registered plan’s tax exemption.
Question 3 – Monetary value of incentive
We consider the value of the incentive relative to the amount invested to be a significant factor in determining if an incentive program is commercially reasonable. For example, the incentive programs described in examples 2, 4, 5 and 6 of the Advantages Folio provide relatively small benefits in comparison to the controlling individual’s total investments. This indicates that the benefit is commercially reasonable and is offered for a genuine promotional purpose by the financial institution. We would expect that market constraints will generally ensure that incentive programs are in fact commercially reasonable if offered to a broad class of investors.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Premium | referral bonus is considered to be a premium contributed to the plan | 167 |
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
3.12 Fee waivers, preferential pricing, bonus interest and other promotional incentives offered by financial institutions typically satisfy one or more of the exceptions in (a)(i), (ii) and (v), e.g.:
Example 3
A financial institution offers a free tablet to new clients who open a TFSA or RRSP and maintain a minimum account balance of $10,000 for at least six months.
Example 6
A financial institution pays $100 in cash directly to the plan of new customers who open an RRSP, RRIF or TFSA and maintain a minimum balance of $50,000 for at least one year. (The payment also is not a contribution.)
3.13 However, a cash prize paid directly to the winner’s plan would be covered by the (a)(v) exception, but would be a contribution.
3.14 Where a plan holds or is structured as an annuity contract with a life insurance component, there is an advantage each year, generally measurable by the cost of equivalent term-life insurance coverage.
Paragraph (b)
Administrative Policy
S3-F10-C1 - Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
Advantage tax
1.44 The advantage tax in section 207.05 could apply if an RRSP, RRIF or TFSA trust were to engage in certain option transactions. For example, this would be the case where:
- the counterparty to the option contract does not deal at arm's length with the annuitant or holder, or
- the contract does not reflect commercial terms, which serves to artificially shift value into or out of the registered plan.
7 November 2012 External T.I. 2012-0437821E5 F - Registered Plan - Advantage
Would the transfer of an individual’s shares of a credit union to the individual’s RRIF, RRSP or TFSA ("registered plan") comes within the concept of advantage? After noting that a "swap transaction" includes, in respect of a registered plan, any transfer of property between the plan and its controlling individual, subject to specified exceptions, and that the concept of "advantage" in s. 207.01(1) “specifically states that any benefit that is an increase in the total fair market value of the property held in connection with the registered plan is considered a benefit if it is reasonable to consider, having regard to all the circumstances, that the increase is attributable, directly or indirectly, to a ‘swap transaction’," CRA stated:
Furthermore, the phrase directly or indirectly, used in the definition of advantage, includes (if that is the case) any immediate increase in the FMV of the registered plan resulting from the swap transaction, as well as any increase in the FMV of the registered plan that can be attributed to the initial swap transaction. For example, an advantage includes, among other things:
- any dividend, interest or other amount attributable to the property transferred,
- any increase in the value of the transferred property or the property that replaces the transferred property (whether or not the increase was realized),
- any income earned on the income.
14 February 2012 External T.I. 2011-0416621E5 F - REER, swap
Respecting a proposed swap of a savings bond held in an RRSP and a savings bond held in a non-registered account, before concluding that it was “subject to the concept of advantage either as a swap transaction or as an RRSP strip,” CRA stated, respecting the advantage definition:
Consequently, under the definition of advantage, any increase in the FMV of property held in an RRSP that is reasonably considered, in the circumstances, to be attributable, directly or indirectly, to a swap transaction is considered an advantage that is subject to tax. In that regard, the fact that the swap transaction is conducted at FMV is not relevant. The expression, directly or indirectly, used in the definition of advantage, includes (as applicable) any immediate increase in the FMV of the RRSP resulting from the swap transaction, as well as any increase in the FMV of the RRSP that it is possible to attribute to the initial swap transaction. For example, tax in respect of an advantage includes inter alia;
- any dividend, interest or other amount attributable to the swapped property,
- any increase in value of the swapped property or property that replaces the swapped property (regardless of whether or not the increase was realized),
- any income earned on income.
The tax respecting an advantage must be paid on an annual basis. It is therefore necessary to annually calculate the increase in the FMV of the RRSP resulting from an advantage.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - RRSP Strip | swap of savings bond between RRSP and non-registered account would be an RRSP strip | 74 |
Subparagraph (b)(i)
Cases
Louie v. Canada, 2019 FCA 255
From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high trading price for the day, if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that those FMV increases were “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
In affirming the Tax Court’s finding respecting the 2009 swaps that they were a series of transactions described in s. (b)(i), i.e., they were transactions that “would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly” and that one of the main purposes of the series was to benefit from the ability to ultimately withdraw amounts from the TFSA tax-free, Dawson JA stated (at para. 34) that “[t]he Tax Court did not err in finding that the appellant was the single mind directing all of the swap transactions,” and (at paras. 41, 50):
[T]he result of the appellant’s strategy was to inflate the value of the TFSA so as to benefit from a tax-free distribution from her TFSA (as opposed to a taxable withdrawal from her RRSP or a taxable gain within her Canadian trading account). ...
… [T]he use of the phrase “directly or indirectly” evidences Parliament’s intent “to capture any and all methods through which a transaction could increase” the fair market value of a TFSA
The TCC had allowed the appeals for the 2010 and 2012 taxations years on the basis that the phrase “directly or indirectly” in s. 207.01(1)(b) should be narrowly interpreted; and that the increase in the fair market value of the TFSA in 2010 and in 2012 was not attributable to the swap transactions, but rather to favourable market conditions in those years.
In allowing the Crown’s cross-appeal for those years, Dawson JA stated (at paras 75, 77 and 82):
[T]he Tax Court’s concern about “when or how far into the future an advantage … will be considered as attributable to” abusive transactions did not justify a restrictive interpretation of the definition of advantage. … The ability to waive an advantage tax and reset an individual’s unused TFSA contribution room are the mechanisms intended to address the future impact of abusive transactions. …
The anti-avoidance purpose of sections 207.01 and 207.05 supports a broad interpretation of the definition of “advantage”.
… [W]hile the increase in value in the TFSA in 2010 and 2012 was directly attributable to the performance of the shares held in the TFSA each year, it was indirectly attributable to the swap transactions which increased the number of shares held in the TFSA and their value.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.06 - Subsection 207.06(2) | concerns about future value increases are intended to be addressed by relief provisions | 368 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) | no necessity for predetermined endpoint or advance determination of price | 203 |
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | taxpayer was directing mind in transactions involving an arm’s length trustee | 133 |
See Also
Louie v. The Queen, 2018 TCC 225, rev'd in part on "advantage" issue (for subsequent years) 2019 FCA 255
From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed tax-free savings account (“TFSA”) and her taxable trading account (“CDN”) at TD Waterhouse Discount Brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The TDW policy was to permit a transfer to occur at any price between the high and low trading prices for the day. Accordingly, the transfers were made near the close of trading for the day, and at the high price if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value (“FMV”) of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that there had been “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Lamarre ACJ found that the swaps constituted a series of transactions to which the 2009 increase in FMV was attributable, and “that benefiting from the exemption from tax under Part I was one of the Appellant’s main purposes in completing the series of transactions” (para. 37) and that (para. 41) the requirement set out in s. (b)(i)(B) of the “advantage” definition was met as:
The taxpayer must have intended to benefit from a tax-free distribution from her TFSA as opposed to a taxable withdrawal from her RRSP or a taxable gain within her CDN. Otherwise, I cannot see any advantage to transferring the shares between those accounts.
In finding that the test in s. (b)(i)(A) also was satisfied, Lamarre ACJ further found (at para. 45):
If there is a second-by-second market price, the FMV is the price at the second the swaps occur, not a price selected within a bracket of prices.
Furthermore, the swaps were not transactions between persons dealing at arm’s length, as the taxpayer “was the single mind directing all the swap transactions” (para. 55) and “the parties in control of the RRSP and CDN acted in concert without separate interests” (para. 56).
In addition, “all the swap transactions were carried out in such a way as to favour the TFSA to the detriment of the RRSP and CDN” (para. 57). Accordingly, “the series of swap transactions would not have occurred if the parties had been dealing at arm’s length and were acting prudently, knowledgeably and willingly.”
However, Lamarre concluded that none of the increase in FMV in 2010 and 2012 was attributable to the swap transactions, finding (at paras 78, 80-82):
The broad scope of “directly or indirectly” is limited by the reasonableness requirement also present in paragraph (b). In this case, the circumstances that it is reasonable to consider in deciding whether the 2010 and 2012 increases are attributable to the 2009 swaps include the fact that, unlike in 2009, in the 2010 and 2012 taxation years the Appellant was no longer engaging in swap transactions and the account was subject purely to market forces.
…[I]t is reasonable in the circumstances to attribute the 2010 and 2012 increases to the post-2008 financial recovery. …
Justice Woods’ concerns in Garron about the ambiguity inherent in the phrase “directly or indirectly” may perhaps not be entirely appropriate in the context of the transfer of property … [which] has a defined end point, although a circuitous route may be taken to get there. Here there is no easily defined or delineated end point … regarding the length of time during which an increase may still be attributed to an impugned transaction.
A more restrictive interpretation of paragraph (b) … avoids these difficulties.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) | share swap transactions were series notwithstanding that their particulars and end point were not known in advance | 181 |
| Tax Topics - Income Tax Act - Section 207.05 - Subsection 207.05(3) | holder rather than trustee liable for advantage tax | 146 |
| Tax Topics - General Concepts - Fair Market Value - Shares | use of price range for share valuation was inappropriate where there was a second-by-second market | 171 |
Administrative Policy
27 November 2018 CTF Roundtable Q. 12, 2018-0785021C6 - Investment management fees
CRA stated:
The Department of Finance Canada advised us earlier this year that they will be reviewing the issue from a tax policy perspective. As a result, in our letter of September 28, 2018 (2018-077926), we announced that we would defer implementation of the position pending completion of this review.
28 September 2018 External T.I. 2018-0779261E5 - Investment management fees
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that it now considered the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will be considered to be an “advantage” giving rise to tax under s. 207.05(1) equal to 100% of the fee amount (noting inter alia under the hypothetical arm’s length test in s. 207.01(1) – advantage - (b)(i) that it would not be “commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party”) but that to give the investment industry time to make the required system changes, it would defer applying this new position until January 1, 2018. 2017-0722391E5 announced a one-year extension to January 1, 2019.
CRA now stated:
[W]e will be deferring implementation of the position pending completion of a review of the issue by the Department of Finance Canada.
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
3.22 Example 10 (bid/ask plan strip)
Two unrelated individuals effectively transfer all the value in their RRSP to their TFSA by having their TFSA continually buy securities from the other’s RRSP at the bid price and sell them back to the other’s RRSP at the ask price. These would give rise to advantages under (b)(i) and would also be a registered plan strip.
3.41 Example 12 (non-pro rata fund rebates)
A mutual fund dealer convinces an individual to switch mutual fund companies and agrees to share 40% of the 5% sales commission he will earn on the purchase of the new funds. The individual asks the dealer to allocate the rebates fully to his TFSA and RRSP and none to his taxable account. The amount of the advantage would be equal to the amount by which the actual rebates paid into the RRSP and TFSA exceeds the amount that would have been paid if the total rebates had been allocated to the three accounts on a pro rata basis. All future increases in the FMV of the plan property relating to the initial advantages would also give rise to advantage tax.
15 September 2017 External T.I. 2017-0722391E5 - Investment management fees
In 29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6, CRA indicated that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will now be considered to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount) but that to give the investment industry time to make the required system changes, it would defer applying this new position until January 1, 2018. CRA now stated:
We are currently considering a number of submissions from various stakeholders and will be deferring the proposed implementation date by one year to January 1, 2019.
29 November 2016 CTF Roundtable Q. 5, 2016-0670801C6 - Investment management fees
CRA considers that the payment of fees for investment management of an RRSP, RRIF or TFSA by the plan annuitant or holder typically will be considered to be an “advantage” for Part XI.01 purposes (i.e., giving rise to a tax equal to 100% of the fee amount). In particular, although there is no automatic application of the advantage rules in this situation, there is a strong inference of an advantage, especially where there is a large plan and the investment management fees are determined on a percentage basis.
However, to give the investment industry time to make the required system changes, CRA will defer applying this new position until January 1, 2018. Investment management fees that are reasonably attributable to periods ending before 2018, and are paid by the annuitant or holder will have no adverse tax consequences.
Finance
26 August 2019 Comfort Letter - “Advantage”: Exclusion for Investment Management Fees
[If] investment management fees of registered plans … are paid directly by the holder/annuitant using funds outside of the plan, the resulting indirect increase in the value of the plan assets might be viewed as an advantage … if one of the main purposes is to benefit from the tax-exempt status of the plan.
Even so, we have no tax policy concerns with respect to the payment of investment management fees directly by the annuitant/holder of the registered plan. … Generally, the direct payment of fees results in either a net loss, or negligible gain, for the plan holder. We are therefore prepared to recommend … clarifi[cation] that the payment by a controlling individual (as defined in subsection 207.01(1)) of investment management fees that pertain to a registered plan does not constitute an advantage … [and] [s]pecifically … that paragraph (b) of the definition "advantage" in subsection 207.01(1) be amended [respecting 2018 and subsequent taxation years] such that it does not apply to payments by a controlling individual of a registered plan, not exceeding a reasonable amount, of fees described in paragraph 20(l)(bb) … .
Subparagraph (b)(ii)
Administrative Policy
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
Example 7 (performance prefs)
Private company employees whose plans are issued non-voting prefs that pay dividends well in excess of the subscription price taking into account the company’s performance relative to benchmarks receive a (b)(ii) advantage.
Example 8 (freeze common shares to employee)
Where at the same time as an estate freeze an employee received common shares of the Freezeco (an arm’s length employer) for nominal consideration and immediately contributed the shares to her TFSA, there would be an advantage equalling the shares’ subsequent appreciation (as well as any dividends received thereon).
Example 9 (warrants contributed at nominal intrinsic value)
Where an individual contributed common share warrants to his TFSA for their nominal intrinsic value, the subsequent gain realized by the TFSA on exercise would be an advantage given that “The intrinsic value of a warrant or option is not reflective of the property’s FMV”.
Paragraph (c)
Administrative Policy
17 April 2013 External T.I. 2012-0457011E5 F - Coop Shares in RRSP and Prohibited Invest. Rules
The correspondent expressed concern that although the new rules effectively required an RRSP holding shares of a cooperative to dispose of some of those shares, the regulatory regime made it difficult or impossible for the cooperative to repurchase such shares. CRA stated:
By virtue of subsection 207.05(2), the tax payable is generally 100% of the FMV of the benefit. Thus, where an RRSP trust holds a prohibited investment, any income (determined without the dividend gross-up) or capital gain reasonably attributable, directly or indirectly, to the prohibited investment will be an advantage (as defined above). That advantage will be subject to that 100% tax. In general, any income earned or capital gain realized after March 22, 2011 that is attributable to cooperative shares that have been prohibited investments since the new rules came into force is subject to that tax. Any income earned and any realized capital gain attributable to shares acquired by an RRSP trust after March 22, 2011 is also subject to such tax if such shares are prohibited investments or non-qualified investments for the RRSP trust. Proposed subsections 207.01(6) and (7) particularly facilitate the calculation of the capital gain attributable to a prohibited investment by respectively providing for a deemed disposition and re-acquisition when a property becomes or ceases to be a prohibited investment, and a deemed cost at the end of March 22, 2011 for the calculation of the adjusted cost base of property that was a prohibited investment for an RRSP trust on March 23, 2011.
Tax under subsection 207.05(1) is a tax that must be paid annually on any income earned or capital gain realized in the year that is reasonably attributable, directly or indirectly, to property that is a prohibited investment. The annuitant of a RRSP trust subject to tax under subsection 207.05(1) could therefore, depending on the circumstances, wish that the RRSP trust dispose of all or part of the prohibited investment shares in order to no longer be subject to that tax. Again, a repurchase of shares by the cooperative is just one way that the RRSP trust can dispose of cooperative shares that have become excessive under the new rules.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Excluded Property - Paragraph (c) | shares can become prohibited investments as a result of other shareholders dispose of their shares | 367 |
| Tax Topics - Income Tax Act - Section 207.04 - Subsection 207.04(4) | dispositions that generate the refund are not limited to redemptions of the shares | 220 |
Excluded Property
Paragraph (c)
Administrative Policy
17 April 2013 External T.I. 2012-0457011E5 F - Coop Shares in RRSP and Prohibited Invest. Rules
In the course of a general discussion of the application of the prohibited investment rules to an RRSP that held shares of a cooperative on March 23, 2011, CRA stated:
The question of whether a property is a prohibited investment for an RRSP trust is applicable at all times. Although shares of a cooperative were qualified investments for a particular RRSP trust by virtue of the rules applicable at the time of the coming into force of the new rules, those shares could be prohibited investments for the RRSP trust on and after March 23, 2011, to the extent that they were not excluded properties. This would be the case if, at the time of the coming into force of the new rules, the annuitant held (taking into account the shares held directly by the annuitant, as well as those held by the RRSP trust and any person not dealing at arm's length with the annuitant) not less than 10% of the shares of a class of shares of that cooperative. All shares of the cooperative, to the extent that they are not excluded properties, would, as of March 23, 2011, be prohibited investments for the RRSP trust. Similarly, if, at a time after the new rules come into force, the annuitant, the annuitant’s RRSP trust or a person with whom the annuitant does not deal at arm's length acquires new shares, so that the annuitant now holds (taking into account the shares held directly, as well as those held in particular by the RRSP trust and any person not dealing at arm's length with the annuitant) not less than 10% of the shares of a class of shares of the cooperative, then all of such shares of the cooperative, to the extent that they are not excluded property, will therefore become prohibited investments for the RRSP trust. Shares of a cooperative may also become prohibited investments if they are not excluded property and at a time after the new rules come into force, other shareholders of the cooperative (holding shares of the same class as those held, directly or indirectly, by the particular annuitant) dispose of their shares, thereby increasing by at least 10% the percentage of such Shares held by the particular annuitant.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.04 - Subsection 207.04(4) | dispositions that generate the refund are not limited to redemptions of the shares | 220 |
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (c) | advantage tax on net capital gains and income of RRSP from cooperative shares | 344 |
S3-F10-C2 - Prohibited Investments – RRSPs, RRIFs and TFSAs
Meaning of "regarding the governance"
2.18 ... One of the conditions [in "excluded property" - (c)(iii)] sets limits regarding the governance of the investment entity. ...[T]he phrase governance of the investment entity should be given a wide meaning. For example, where the investment entity is a corporation, the condition might not be satisfied because of the votes that could be cast at either a general meeting of shareholders or at a meeting of the board of directors.
26 November 2014 External T.I. 2014-0545041E5 - Registered plans - Excluded property
The annuitant of an RRSP or RRIF or the holder of a TFSA owns 2% of the shares (being common shares only) of a corporation and together with the trust owns no more than 10% of the shares, and the conditions in para. (c) (before turning to subpara. (iii)), are otherwise satisfied. The individual is one of five directors and thereby can cast 20% of the votes at a board meeting. There is no USA. CRA stated that the individual:
…has the right to cast at least 10% of the votes that could be cast regarding the governance of the corporation and, therefore, subparagraph (c)(iii) of the "excluded property" definition would not be satisfied.
Exempt Contribution
Paragraph (b)
Administrative Policy
11 October 2019 APFF Financial Strategies and Instruments Roundtable Q. 7, 2019-0821701C6 F - TFSA Exempt Contribution - Survivor payment
Mr. X, who died on January 1, 2018, made a specific bequest of his TFSA to his surviving spouse (Ms. Y). However, the estate administration proceeded slowly, and it was not until after December 31, 2019, i.e., the rollover deadline in para. (a) of the s. 207.01(1) definition of “exempt contribution” (the “Definition”), that the executor liquidated the TFSA and paid the proceeds of $100,000 (also corresponding to the TFSA’s value on death) to Ms. Y.
Is Ms. Y permitted to make a contribution to her TFSA as an “exempt contribution” upon receipt of the funds? CRA responded:
[P]aragraph (a) of the Definition gives the Minister the discretion to extend the rollover period. In such a case, the rollover period so extended shall be relevant not only for the purposes of paragraph (a) but also for the purposes of paragraph (b). As a result, a survivor payment made after December 31 of the first calendar year that begins after the death of the TFSA holder could satisfy the conditions of paragraph (b) of the Definition, provided that the Ministerial discretion is exercised to extend the rollover period. Thus, in the situation described, Ms. Y could, after receiving the amounts paid by the executor, make a contribution to her own TFSA and designate it as an exempt contribution, if the Ministerial discretion is exercised in her favour to extend the rollover period.
11 October 2019 APFF Financial Strategies and Instruments Roundtable Q. 6, 2019-0813451C6 F - TFSA - Bequest and disclaimer
Although Mr. X made a specific bequest of his TFSA to his adult daughter, she executed a written renunciation of the bequest (that CRA went on to find was deemed by s. 248(9) to result in a “disclaimer” or a “release or surrender” for purposes of s. 248(8)(b),) so that following the TFSA's liquidation by the executor, the proceeds were transferred to Ms. Y (the surviving spouse of Mr. X) as the residuary beneficiary. Ms. Y contributed then $100,000 to her own TFSA (within the “rollover period” as set out in para. (a) of the s. 207.01(1) definition of “exempt contribution.”)
Was Ms. Y permitted to designate her contribution as an “exempt contribution”?
CRA stated that “the principal question is whether the payment is made as a consequence of the individual's death” and, in addition to referencing the s. 248(8)(b) rule, noted that “paragraph 248(8)(a) provides, in particular, that a transfer … of property made … as a consequence of [the taxpayer’s] will is considered to be a transfer … made as a consequence of the death of the taxpayer.” CRA then stated that it was “generally of the view that the payment of $100,000 made by the executor to Ms. Y of the TFSA proceeds would be a payment made as a consequence of Mr. X's death by virtue of subsection 248(8).”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(b) | transfer of TFSA to survivor on renunciation of bequest thereof occurred as a consequence of death | 135 |
11 October 2019 APFF Financial Strategies and Instruments Roundtable Q. 4, 2019-0813421C6 F - TFSA - Survivor Payment - Decrease in FMV
Situation 1
Mr. X made a specific bequest of his TFSA to his spouse (Ms. Y), which had declined in value from $100,000 to $90,000 between death and its liquidation and transfer to Ms. Y, who contributed $100,000 to her TFSA. The residue was transferred to the surviving daughter.
Situation 2
Same as Situation 1 except that Ms. Y also received the residue of $200,000.
Situation 3
Same as Situation 1 except that the executor immediately liquidated the TFSA for $100,000 and invested it. Ultimately, $290,000 was distributed to Ms. Y.
Situation 4
Same as Situation 2 except that executor immediately transferred the TFSA property to an estate investment account, with such property diminishing in value to $90,000 before the proceeds of it and the residue of $200,000 were distributed to Ms. Y.
In Situations 1 and 2, were the survivor payments and "exempt contributions," as defined in s. 207.01(1) (the "Definition") $90,000 and $100,000, respectively – and what about Situations 3 and 4?
After indicating that “a particular payment may qualify as a survivor payment, whether the money is paid directly to the survivor under the TFSA or first paid to the executor before it is paid by the executor to the survivor” and also referencing s. 248(8)(a), CRA stated:
Thus, where amounts from a deceased holder's TFSA are first paid to the executor of the estate before being paid by the executor to the survivor … the survivor payment is equal to amounts paid under the TFSA to the estate of the deceased holder, to the extent that the survivor is entitled to a TFSA by virtue of the will of the deceased holder … and the survivor receives an equivalent or higher amount from the estate as a result of the death of the deceased holder.
Accordingly, in Situations 1 and 2, the limit would be $90,000 and $100,000 in Situations 3 and 4.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Unused TFSA Contribution Room - Paragraph (b) - Element D | diminution in TFSA property in executors' hands reduces exempt contribution | 208 |
6 June 2017 External T.I. 2015-0617331E5 F - TFSA - Exempt Contribution
Would the transfer of a TFSA to the deceased's spouse as a total or partial payment of a debt owed to the spouse under the partition of the family patrimony, the dissolution of a matrimonial regime, a gift made by marriage contract, a post-mortem obligation to provide support or a spousal compensatory allowance comply with para. (b) of the definition of "exempt contribution"? Where the executors satisfied a legacy of a specific property (e.g., a residence) through the transfer of the property held in the TFSA (i.e., property other than the specific property that was the subject of the legacy), would that payment satisfy para. (b)?
After referencing the requirement for the payment to be made during the rollover period, CRA paraphrased s. 248(23.1)(a), and stated:
Consequently… the transfer or distribution of property held in the TFSA by the executors to the surviving spouse as a total or partial payment of the rights referred to in paragraph 248(23.1)(a) could constitute a survivor payment that is indirectly derived from an arrangement that ceased to be a TFSA because of the death of its last holder and is made as a consequence of the death of the individual as required under paragraph (b) of the Definition.
CRA also indicated, similarly to 2016-0679751E5 F, that, in light inter alia of s. 248(8)(a), a payment could be considered to be made to a surviving spouse directly or indirectly out of the former TFSA as a consequence of the deceased’s death where an executor in his discretion chooses to satisfy a legacy of specific property (in this case, of the residue of the estate, which included the family residence) by retaining the proceeds from the sale of the residence and instead paying an equivalent amount out of TFSA property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(23.1) - Paragraph 248(23.1)(a) | payment of family-law obligation of deceased to surviving spouse out of deceased's TFSA could qualify | 79 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) | legacy of residue (which included the residence) could be satisfied with TFSA of deceased | 91 |
11 May 2017 External T.I. 2016-0679751E5 F - TFSA - Exempt Contribution
Would a transfer of funds from a deceased holder's TFSA to the holder's surviving spouse in order to pay a specific legacy satisfy para. (b) of the definition for "exempt contribution," even though under the will the executor has the discretion as to which estate property will be used to satisfy the specific legacies? CRA responded:
Taking into account the words "directly or indirectly", a particular payment may qualify as a survivor payment [as defined in para. (b) of “exempt contribution”] whether the money is paid directly to the survivor under the arrangement or it is first paid to the executor of an estate before being paid by the executor to the survivor.
After referencing s. 248(8)(a), CRA stated:
The fact that the will provides for legacy of a sum of money to the surviving spouse rather than specifically providing a legacy of all or part of the TFSA would not in itself prevent the payment from being a survivor's payment for the purposes of the definition of "exempt contribution," to the extent that the executor has the authority under the will to satisfy the legacy out of the money that was held under the TFSA.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) | legacy made by executor exercising discretion conferred under will occurred because of death | 72 |
Paragraph (c)
Administrative Policy
11 October 2019 APFF Financial Strategies and Instruments Roundtable Q. 5, 2019-0820901C6 F - TFSA Exempt Contribution - Timing of contribution
Mr. X, who died on January 1, 2018, had made a specific bequest of his TFSA (valued at death at $100,000) to his spouse (Ms. Y), who contributed the same amount to her TFSA on June 15, 2019. However, the executors did not liquidate the TFSA and pay the proceeds of $100,000 to her until after this contribution date (but before the December 31, 2019 rollover deadline provided in para. (a) of the s. 207.01(1) definition of “exempt contribution"). Did her contribution qualify as an exempt contribution?
After indicating that the “exempt contribution” definition did not “require that the survivor payment be received before the contribution is paid,” CRA noted that the definition “requires that the contribution be designated in prescribed form (Form RC240), within 30 days after the day on which the contribution is made (or at any later time that is acceptable to the Minister).”
Accordingly:
In the event that Ms. Y receives a survivor payment more than 30 days after making her contribution but within the rollover period, she may request the exercise of Ministerial discretion … . Only if the Minister accepts the filing of Form RC240 at a time after the expiry of the 30-day period may Ms. Y's contribution qualify as an excluded contribution.
Paragraph (d)
Subparagraph (d)(iii)
Administrative Policy
5 October 2012 Roundtable, 2012-0453171C6 F - TFSA - Survivor payments to more than one survivor
In Situation 1, on the death of Mr. X, his will directed the $20,000 in his TFSA held with a Canadian financial institution to be paid as to $15,000 to his estranged surviving wife (Ms. X), and as to $5,000 to his surviving common law spouse (Ms. Y). Situations 2 and 3 are the same except that the $15,000 and $5,000 had been held by him in two separate TFSAs at two Canadian financial institutions (Situation 2) or at one such institution (Situation 3).
In Situation 1 will the CRA use its discretion to allow Ms. X and Ms. Y to designate the entire TFSA survivor payments they received ($15,000 and $5,000, respectively) as an "exempt contribution" for the purposes of s. (d)(iii) of the definition in s. 207.01(1) since the total amount ($20,000) to be designated by Ms. X and Ms. Y (the two survivors) would be equal to the amount that would otherwise be eligible for the exempt contribution designation, by virtue of para. (d), if there were only one survivor (i.e., $20,000)? Would the answers for Situations 2 and 3 change on the basis that there were two separate "arrangements," so that no exercise of CRA discretion was required? CRA responded:
[S]ubparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) applies, inter alia, where payments described in paragraph (b) of that definition are made to more than one survivor of a particular individual, regardless of whether those payments originated from one or more arrangements that ceased to be TFSAs of the particular individual.
…[B]oth the payment received by Ms. X and the payment received by Ms. Y would be a "survivor payment" described in paragraph (b) of the definition of "exempt contribution". It follows that subparagraph (d)(iii) of the definition "exempt contribution" in subsection 207.01(1) would find application in all three situations.
…[A] contribution of an amount greater than nil could generally be allowed by the Minister under subparagraph (d)(iii), provided that the total amount to be designated by Ms. X and Ms. Y is less than or equal to (but not greater than) the amount that would otherwise qualify for the designation "exempt contribution" under paragraph (d) of that definition, if there was only one survivor.
Thus, in the three situations described, the respective $15,000 and $5,000 contributions of Ms. X and Ms. Y could generally be allowed … .
8 October 2010 Roundtable, 2010-0371961C6 F - Époux et conjoint de fait et CÉLI au décès
The deceased individual provided for the splitting of his TFSA equally between his wife (from whom he lived separate and apart) and his common-law partner. The definition of "exempt contribution" provides that the exempt contribution amount will be nil if there were two "survivors" receiving a TFSA payment – but s. (d)(iii) of "exempt contribution" grants discretion to the Minister to allow for an "exempt contribution", even if there was more than one survivor receiving amounts from the deceased's TFSA. When will this discretion be granted? CRA responded:
[W]here an individual, at the time of death, has both a spouse and a common-law partner who are "survivors" within the meaning of subsection 146.2(1) and payments are made to those two survivors in circumstances where the other conditions of the definition of "exempt contribution" are satisfied, a contribution of an amount greater than nil could generally be accorded by the Minister under the paragraph (d)(iii), provided that the total amount to be designated by the two survivors is less than or equal to (but not greater than) the amount that would otherwise qualify for designation as an "exempt contribution" under paragraph (d) of that definition, if there were only one survivor.
In the event that the aggregate amount that both survivors attempt to designate as an exempt contribution exceeds the maximum amount allowed, additional information may be required from either or both of the survivors in order for a reasonable designation to be allowed … [including] the conditions specified in the will … .
Registered Plan Strip
Administrative Policy
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
Definition can apply even where no property removal
3.34 The definition [of registered plan strip] is intended to apply even in situations where no amount was traceably removed from a registered plan but where nevertheless the value of the plan has been reduced. For example, this could occur by way of artificial transactions that dilute the equity value of a corporation, trust or partnership in which the plan has invested. It could also occur where a plan has directly or indirectly invested in a debt obligation and steps are taken to ensure that the debt cannot be repaid (or no actions are taken to enforce repayment).
1 June 2016 External T.I. 2015-0601211E5 - Mortgage loan from RRSP to make a shareholder loan
An individual, who is an RRSP annuitant, borrows the “Mortgage Loan” from the RRSP, with a principal residence mortgage granted in favour of the RRSP as security. The Mortgage Loan would be administered by an approved lender under the National Housing Act and would be insured as required by Reg. 4900(1)(j.1) by an approved private insurer. The Mortgage Loan proceeds would be used to make an interest-free shareholder loan to a corporation controlled by the individual.
After indicating that the Mortgage Loan would be a qualified investment under Reg. 4900(1)(j.1)(d), CRA stated:
[W]here a mortgage loan that satisfies the requirements of paragraph 4900(1)(j.1)…is granted by an RRSP, the underlying nature of those requirements is such that the fair market value of the property of the RRSP is not usually reduced immediately after the granting of the mortgage loan. However, an RRSP strip could arise after the granting of the Mortgage Loan if, for example, there is a default under the Mortgage Loan by the borrower, the subject RRSP sustains a loss of principal or interest under the Mortgage Loan as a result of the default, the loss or a portion of the loss is not covered by the mortgage default insurance policy, and the purpose test in the definition of “RRSP strip” is met.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) | money borrowed by individual from RRSP to make interest-free loan to corporation | 175 |
| Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(1) - Paragraph 4900(1)(j.1) | use of qualified mortgage loan proceeds of no import | 178 |
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (a) | 4900(1)(j.1) insurance requirements generally arm's length/potential advantage on default | 239 |
16 October 2012 External T.I. 2012-0439151E5 - RRSP strips and prohibited investments
Respecting an expressed concern that the sale of a prohibited investment by an RRSP or RRIF to the annuitant for fair market value consideration may be viewed as an RRSP strip notwithstanding that the transaction is expressly excluded from the "swap transaction" definition, CRA stated:
if a prohibited investment held by an RRSP or RRIF is sold by the RRSP or RRIF to the annuitant of the RRSP or RRIF for cash consideration equal to the fair market value of the prohibited investment, the sale transaction will not be treated as an RRSP strip.
Prohibited Investment
Administrative Policy
18 February 2009 External T.I. 2008-0304051E5 - TFSA - Mutual Fund being a Prohibited Investment
Mutual fund trusts will be considered to be prohibited investments if the holder of the TFSA, either alone or with other non-arm's length parties, has a 10% or more fair market value interest in the trust.
Articles
Todd Miller, Michael Friedman, Carl Irvine, "The New RRSP/RRIF Anti-Avoidance Regime: A Roadmap and Tips for the Unwary", Taxation of Executive Compensation and Retirement, Vol. 23, No. 4, p. 1463
In light of the breadth of "significant interest" (p.1465):
It is possible that an individual could unknowingly hold a "significant interest" in an entity as a result, for example, of the holdings of other family members, family trusts, or personal holding companies.
Furthermore (pp. 1466-1467):
A key feature of the test contained in subsection 4900(14) of the Regulations is that, in order to be a "qualified investment" for a Registered Plan, the shares need only meet the criteria set out in subsection 4900(14) of the Regulations at the time they are acquired by the Registered Plan (i.e., notwithstanding that the corporation may cease to be a "specified small business corporation" at a later time).
However, new section 5001 of the Regulations deems such shares to be a "prohibited investment" at a particular time if, at that time, the corporation is not a "specified small business corporation." As a result of this change, annuitants who hold shares in their Registered Plan on the basis that they are "qualified investments" pursuant to subsection 4900(14) of the Regulations will have to also ensure that the corporation continues to qualify as a "specified small business corporation" on an ongoing basis.
Paragraph (b)
Subparagraph (b)(i)
Administrative Policy
22 November 2012 External T.I. 2012-0441781E5 F - Prohibited Investment - Cooperative
Before concluding that an investment in a cooperative could be a prohibited investment because of s. 207.01(1)(b)(i) of “prohibited investment” if the controlling individual has a significant interest in such corporation, CRA first indicated that “for the purposes of the Act, a cooperative is a corporation, a share of the capital stock of a cooperative is a share and a member can be a shareholder.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(15) | application to shares of cooperative | 106 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder | investor in cooperative holds shares and is shareholder | 172 |
RRSP Strip
Administrative Policy
14 February 2012 External T.I. 2011-0416621E5 F - REER, swap
Respecting a proposed swap of a savings bond held in an RRSP and a savings bond held in a non-registered account, before concluding that it was “subject to the concept of advantage either as a swap transaction or as an RRSP strip,” CRA paraphrased the "RRSP strip" definition and stated:
Therefore, a swap transaction that results in the reduction of an RRSP balance is considered an advantage under the definition of an "RRSP strip".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) | computation of advantage from swap transaction | 239 |
Swap Transaction
Administrative Policy
S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
Permitted exceptions
3.25 Contributions, distributions to the plan’s controlling individual, 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. Furthermore, the issuance of an insured debt obligation secured by a mortgage or hypothec described in paragraph 4900(1)(j.1) of the Regulations and any payment of principal or interest on the obligation are not treated as swap transactions.
3.26 The sale of a non-qualified or prohibited investment to a registered plan’s controlling individual (or a person not dealing at arm’s length with the controlling individual) is not treated as a swap transaction. This will only be the case if the individual is entitled to a refund of the 50% non-qualified or prohibited investment tax in respect of the investment. However, if the non-qualified or prohibited investment were sold for more than its FMV, the sale would be viewed as being not commercially reasonable and would constitute an advantage
12 December 2012 External T.I. 2012-0460611E5 - swap of securities between registered plans
[C]ontributions, distributions, and purchase and sale transactions between an individual's two plans with the same tax attributes (i.e., TFSA to TFSA or RRSP to RRSP/RRIF) are not treated as swap transactions.
24 August 2010 External T.I. 2010-0359001E5 - TFSA - Swap Transaction
Can an individual contribute a non-maturing GIC into his or her TFSA? CRA responded:
A "swap transaction", in relation to a TFSA trust, generally means any transfer of property occurring between the trust and the holder of the TFSA or a person with whom the holder does not deal at arm's length, other than a transfer that is a distribution from, or a contribution to, a TFSA trust. This prohibition would apply to transfers between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm's length. However, A taxpayer would still be able to make a transfer of a GIC to or from a TFSA provided the transfer is a contribution into or a distribution out of the TFSA.
Unused TFSA Contribution Room
Administrative Policy
22 October 2015 Internal T.I. 2013-0486491I7 - Overdrafts in a TFSA
Where a trust ceases to be a TFSA pursuant to s. 146.2(5)(c), so that s. 146.2(8) deems the trust to have disposed of all its properties at fair market value proceeds, would this deemed disposition be considered to be a distribution under variable C of the definition of excess TFSA amount and variable B of the definition unused TFSA contribution room in s. 207.01(1), so that the amount would be added back to the taxpayer’s TFSA contribution room in the following year? CRA stated:
Where a TFSA trust disposes of property for fair market value proceeds, the transaction would not constitute a distribution under the TFSA since the holder has received nothing in satisfaction of their interest in the arrangement. …
Accordingly, the de-registration of an individual’s TFSA would cause a permanent loss of TFSA savings room for the individual.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 146.2 - Subsection 146.2(2) - Paragraph 146.2(2)(f) | administrative accommodation of short term inadvertent overdrafts but not of cashless warrant exercise | 340 |
| 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 |
22 November 2012 External T.I. 2012-0468941E5 F - TFSA - XXXXXXXXXX employee working outside Canada
Can someone working outside Canada open a self-directed tax-free savings account (“TFSA”)? After noting that an individual’s residence is a question of fact, CRA stated:
[U]nder the definition of "unused TFSA contribution room" in subsection 207.01(1), the TFSA contribution room does not accumulate in respect of an individual for a particular year if the individual is not resident in Canada in course of the year. As a result, contributions to a TFSA made by a non-resident could result in an "excess TFSA amount" within the meaning of subsection 207.01(1), which would be subject to a special tax under section 207.02. In addition, section 207.03 provides another special tax on non-resident contributions.
Paragraph (b)
Element D
Administrative Policy
11 October 2019 APFF Financial Strategies and Instruments Roundtable Q. 4, 2019-0813421C6 F - TFSA - Survivor Payment - Decrease in FMV
The definition of “exempt contribution” in s. 207.01(1) contemplates that the “survivor” of an individual can make a contribution on an exempt basis to the survivor’s TFSA “as a consequence of the individual’s death, directly or indirectly out of or under [the deceased’s TFSA] that ceased.”
CRA accepted that this “directly or indirectly” wording contemplates situations where “amounts from a deceased holder's TFSA are first paid to the executor of the estate before being paid by the executor to the survivor.”
What happens if the investments in the TFSA declined between the time of death of Mr. X and the subsequent distribution to the survivor (Ms. Y) - namely, from $100,000 to $90,000?
If the executors immediately transferred the TFSA property to an estate investment account, so that the $10,000 diminution in value occurred in that taxable account, then Ms. Y could make an exempt contribution of $100,000 provided that she received a distribution of at least that amount from the estate (e.g., she received a further $10,000 as a residuary beneficiary). On the other hand, if the executors did not liquidate the TFSA until the time of the distribution to Ms. Y, she could only make a $90,000 exempt contribution even if she received a total of $100,000 as estate beneficiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Exempt Contribution - Paragraph (b) | survivor payment equals amounts paid under the TFSA to the estate provided the survivor receives at least that amount as TFSA beneficiary | 286 |
Subsection 207.01(4)
Administrative Policy
S3-F10-C2 - Prohibited Investments – RRSPs, RRIFs and TFSAs
Inclusion of units held in relative's RRSP
2.12 In determining whether an individual has a significant interest in a trust, any units of the trust held in registered plans of family members who are related to the individual must be counted.
Extension of beneficiary in s.248(25)
2.13 ... [A] person is beneficially interested in a trust if they have any right to receive any of the income or capital of the trust as a beneficiary of a trust either directly from the trust or indirectly through one or more trusts or partnerships.
2.14 In the context of registered plans, this means that a controlling individual who holds units of an investment trust in their registered plan would be considered to be a beneficiary of that investment trust. This is because, as the sole beneficiary of the registered plan, they have the right to receive all of the pro rata share of the income and capital of the investment trust indirectly through their registered plan. ... Consequently, those trust units will need to be counted where the plan’s controlling individual does not deal at arm’s length with the other controlling individual for whom the significant interest determination is being made.
Warrants not per se included
2.15 The significant interest test does not require one to assume that warrants or other acquisition rights have been exercised. However, these rights may still need to be taken into account when determining whether an investment is a prohibited investment. This would be the case where an individual holds a sufficient number of rights such that they would not be considered to be dealing at arm’s length with the underlying corporation, partnership or trust either as a factual matter or, in the case of a corporation, because the application of subparagraph 251(5)(b)(i) results in the individual being treated as having control of the corporation and thus related to the corporation.
Paragraph 207.01(4)(a)
Administrative Policy
20 March 2015 External T.I. 2014-0528311E5 - Mortgage Investment Corporation - RRSP
Would a specified shareholder of a mortgage investment corporation include a brother or sister of the RRSP annuitant? After noting that a different result occurred under s. 130.1(6)(d), CRA stated:
[I]f the annuitant, and persons not dealing at arm's length with the annuitant, of the RRSP, individually or together own directly or indirectly 10% or more of any class of shares of the MIC, the investment in the MIC will be considered a prohibited investment for the RRSP. For purposes of the above…an annuitant and a brother or sister of the annuitant are persons who do not deal with each other at arm's length.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 130.1 - Subsection 130.1(6) | shareholdings of siblings not included | 55 |
Subsection 207.01(6)
Administrative Policy
S3-F10-C1 - Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
Effect of deemed FMV disposition
1.77 Subsection 207.01(6) provides a special rule that applies when an investment becomes or ceases to be a non-qualified investment while being held by an RRSP, RRIF or TFSA. Paragraph 206.1(2)(b) provides a similar rule for RDSPs. The rules deem the investment to have been:
- disposed of immediately before that time for proceeds of disposition equal to its fair market value, and
- re-acquired for the same amount at the same time.
This ensures that only the portion of the capital gain or capital loss that accrues during the period in which the investment was non-qualified is taken into account in determining the trust’s adjusted taxable income.
12 July 2013 External T.I. 2012-0447191E5 - RRSP trust taxation under 146(10.1)
An RRSP acquired shares after March 23, 2011, which were listed on a foreign designated stock exchange and were worth $43 per share, but then became delisted (and, thus, non-qualified investment for the RRSP) when they were worth $11. They then were sold for $29 per share.
In intimating that the RRSP had a gain of $18 per share which was taxable under s. 146(10.1), CRA referred to the rule in draft s. 207.01(6) deeming the shares to have been disposed of and reacquired at $11.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 146 - Subsection 146(10.1) | gain due to ACB grind | 77 |
Subsection 207.01(13)
Administrative Policy
28 May 2014 External T.I. 2013-0486111E5 F - RRSP, prohibited investment
The shares of an RRSP, which were prohibited investments held by it on 23 March 2011 and for which it made the transitional benefit election in s. 207.05(4), were subsequently exchanged under s. 51 for shares which were not prohibited investments as defined in s. 207.01(1). CRA stated (TaxInterpretations translation):
When the presumptions in subsection 207.01(13) apply to a property…:
-
Subsection 207.04(1) is not applicable.
-
The property will be a "prohibited investment" and a "transitional prohibited property" subject to the "transitional prohibited investment benefit" concept.
-
Subject to paragraphs 207.05(4)(a) and (b), the transitional rule in subsection 207.05(4) can apply to any advantage which is an amount included in the computation of a transitional prohibited investment benefit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage | no advantage on s. 51 exchange | 83 |
| Tax Topics - Income Tax Act - Section 207.05 - Subsection 207.05(4) | s. 207.05(4) status is preserved following s. 51 exchange | 108 |