Subsection 207.62(1) - Tax payable in respect of advantage
Jon Gilbert, "December 31, 2013 Compliance Planning for Leveraged RCA Arrangements", Tax For The Owner-Manager", Vol. 13, No. 3, July 2013, p. 7
Typical leveraged RCA arrangement (p.8)
In a typical leveraged RCA arrangement, a corporation (Opco) makes a tax-deductible contribution to an RCA, half of which is remitted to the CRA as refundable part XI.3 tax payable on the contribution. The RCA trust then borrows funds from an arm's-length lender, secured in part by the RCA trust's refundable part XI.3 tax balance, and makes an interest-bearing loan to Opco (the Opco loan).
Interest on Opco loan (p.8)
In a leveraged RCA arrangement, the Opco loan technically will be a prohibited investment for the RCA trust, notwithstanding that the loan may be grandfathered for the purposes of the penalty tax on prohibited investments under section 207.61. As a result, interest revenue received by an RCA on an Opco loan will be subject to the advantage tax because it is income from a prohibited investment, unless the Opco loan is grandfathered under the transitional rules related to the "advantage" provisions. The advantage tax payable under section 207.62 by the RCA custodian will be equal to 100 percent of the fair market value of the interest revenue received or receivable in each calendar year on the Opco loan, commencing in 2012.
After finding that the advantage tax in s. 207.62 applied where a specified beneficiary of an RCA assigned her rights to receive distributions from the RCA in order to secure a personal loan, CRA stated:
[T]he advantage tax [under s. 207.62(2)(a)] is equal to the present value of the beneficiary’s savings from the secured borrowing terms as compared to those of an unsecured borrowing. If it had been determined that the loan terms did not reflect arm’s length terms, the full amount of the loan would have been subject to the advantage tax [under s. 207.62(2)(b)].
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|Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(1) - Advantage - Paragraph (a)||advantage tax applies where a specified beneficiary of an RCA assigns her rights to receive distributions from the RCA to secure a personal loan||215|