Section 207.05

Subsection 207.05(2)

See Also

Hunt v. The Queen, 2022 TCC 67

the advantage tax is a tax, not a penalty

The taxpayer contributed shares of a private company each year from 2009 to 2012, and sold the shares in 2013 for around $114,000. After the Minister’s proposed in 2015 to impose “tax” under s. 207.05 in an amount exceeding $114,000, and following negotiation, the Minister offered to reduce such tax by approximately 45%, so that it was imposed at the top marginal rate on the computed advantage amount. After this offer was rejected, the tax was assessed as originally proposed.

In response to a Rule 58 question imposed as to whether such “tax” (after also taking s. 207.06 into account) was “in law a penalty or a tax,” and after noting (at para. 42) that the apparent context of the question was that “[i]f section 207.05 were a penalty, a due diligence defence applies, and a successful defence renders non-qualified income free of tax,” Bocock J found that such provisions imposed a tax, stating (at paras. 44, 58):

Barring ambiguity, any interpretation holding that the words “a tax is payable” creates a penalty, where penalties are otherwise exceptionally stated to be so in the legislation, impugns the coherency of the Act … .

… A charge labelled as a tax may have characteristics so clearly coercive and disproportionate that one concludes it is a penalty; however, this case does not meet that standard.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Section 53 Ministerial discretion to waive tax did not render the tax contrary to s. 53 273

Hunt v. The Queen, 2018 TCC 193, aff'd on narrower grounds 2020 FCA 118

discretion under s. 207.06(2) did not render s. 207.05 unconstitutional

Over the years 2009 to 2012, the taxpayer transferred to his Tax Free Savings Account (“TFSA”) common shares in the capital stock of a privately held corporation which had been issued to him at a low value following an estate freeze. In 2013, his TFSA sold those shares for their fair market value of $114,067.26 ($8,063 per share), with the taxpayer being assessed by the Minister as being subject to the 100% advantage tax under s. 207.05 based on the annual increases in the shares’ FMV totalling to approximately those proceeds (with the Minister later being willing to reduce the advantage tax to the taxpayer’s top marginal rate of federal and provincial tax through a s. 207.06 waiver).

The taxpayer brought a motion pursuant to s. 58(1) of the Tax Court of Canada Rules (General Procedure) for a declaration that s. 207.05 was in contravention of s. 53 of the Constitution Act, 1867 as a consequence of Parliament having improperly delegated the rate-setting element of the charge imposed thereunder to the Minister of National Revenue, arguing (para. 16) that “the existence of the discretionary relieving provision of section 207.06 following 207.05 gives the Minister the discretion to set the tax rate from anywhere between 0 and 100 percent thus amounting to an implied delegation of the right to set the tax rate.”

Pizzitelli J first stated (at para. 14) that “There is … no real dispute between the parties that clear and express language must be used to delegate taxing power to comply with such principle of no taxation without representation”. Before rejecting the taxpayer’s position, Pizzitelli J stated (at para. 28):

… [T]he words of both 207.05 and 207.06 are clear and … each represents a separate stand-alone provision, the first a detailed provision that sets a tax rate of 100 percent on the advantages it clearly defines in 207.01, in regard to detailed transactions it clearly sees as misusing or abusing the TFSA tax exemption regime, with detailed and specific exceptions and, the second, a discretionary ability of the Minister to waive or cancel all or any portion of such 100 percent tax. Section 207.05 makes no reference to being subject to 207.06 to suggest they must be read together and section 207.06 clearly contemplates the 100 percent tax has already been assessed… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 207.06 - Subsection 207.06(2) Minister must consider the three s. 207.06(2) criteria 160
Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Section 91 - Subsection 91(3) 100% TFSA advantage tax did not infringe provincial property-and-civil-rights power 233
Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Section 53 CRA’s discretion to waive tax does not render the tax unconstitutional 155

Administrative Policy

S3-F10-C3 - Advantages – RRSPs, RESPs, RRIFs, RDSPs, and TFSAs

Advantage tax computed only on annual basis

3.45 In the case of an advantage consisting of an increase in the FMV of plan property attributable to certain transactions or events..., each increase in the FMV of plan property constitutes a separate advantage. Theoretically, the FMV increase could be measured on a daily, weekly, monthly or other periodic basis, provided that all of the increase within the measurement period is directly or indirectly attributable to transactions or events listed in the advantage definition. However, because the tax must be remitted annually, the measurement period must end at the end of the calendar year. Where 100% of the increase in FMV is caught by the advantage rules, the CRA will accept that the increase be measured on a calendar-year basis. This will facilitate administration and address inequity by netting out any decreases in value in the calendar year.

S3-F10-C2 - Prohibited Investments – RRSPs, RRIFs and TFSAs

Computation of advantage tax

2.21 The controlling individual of a registered plan is also subject to a 100% advantage tax under section 207.05 on income earned and capital gains realized by the plan that is reasonably attributable directly or indirectly to a prohibited investment. This tax applies to:

  • any income or capital gain from the prohibited investment; and
  • any income or capital gain derived from the reinvestment of those amounts. This is the case regardless of whether this subsequent generation income arose in the plan in which the prohibited investment was held or in another of the individual’s registered plans to which the investment proceeds were later transferred.

For purposes of the advantage tax, income and capital gains are determined in accordance with general income tax rules, except that the dividend gross-up is disregarded.

Subsection 207.05(3)

See Also

Louie v. The Queen, 2018 TCC 225, rev'd in part on "advantage" issue (for subsequent years) 2019 FCA 255

holder rather than trustee liable for advantage tax

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 price if she was transferring out of her TFSA, and at the low price where she was transferring in. After finding that the taxpayer had received an “advantage” for 2009 that was described n s. (b)(i) of the s. 207.01(1) definition, Lamarre ACJ rejected the taxpayer’s argument that TDW was responsible for the advantage tax, stating (at para. 87) that “making the trustee liable simply by virtue of status would render subsection 207.05(3) meaningless” and that no evidence had been provided of any significant role of TDW in the swaps.

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 189
Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) - Subparagraph (b)(i) temporal limitation placed on the advantages considered to arise from TFSA swap transactions 643
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 185

Subsection 207.05(4) - Transitional rule

Administrative Policy

S3-F10-C2 - Prohibited Investments – RRSPs, RRIFs and TFSAs

Transitional relief for locked-in plans

2.33 This transitional rule does not distinguish between locked-in plans and regular plans. Consequently, in a situation where the prohibited investment is held in an RRSP or RRIF that is subject to locking-in provisions under pension benefits legislation, the mandated withdrawal must still be made in order to qualify for the transitional relief. However, there are several solutions that can mitigate a potentially adverse tax result:

  • There is nothing in the transitional rule that actually requires the withdrawal to be made from the particular plan in which the prohibited investment is being held. Consequently, the individual could make the withdrawal from their regular RRSP or RRIF if they have sufficient funds.
  • The individual could swap out the prohibited investment from the locked-in plan so as to avoid triggering advantage tax on future earnings. This would at least resolve the problem on a prospective basis.
  • Individuals may wish to explore the locking-in rules with the applicable pension benefits authority. For example, the rules of the relevant jurisdiction might allow for locked-in RRSP funds to be transferred to a locked-in RRIF starting at a certain age where they become accessible in part. As well, many jurisdictions have relaxed their locking-in rules in recent years to allow some unlocking.

28 May 2014 External T.I. 2013-0486111E5 F - RRSP, prohibited investment

s. 207.05(4) status is preserved following s. 51 exchange

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 89
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 134