Section 207.01

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.

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… .

"[W]hen an RRSP holds the shares of a corporation and the annuitant of the RRSP trust uses without consideration a property of the corporation, the annuitant receives a benefit which is conditional on the existence of the RRSP trust… [TaxInterpretations translation]."

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.

The transfer of a credit union share by an individual to a registered plan (i.e., a registered retirement savings plan, registered retirement income fund, or tax-free savings account) is subject to the advantage rules. The fact that the transfer of shares was made at FMV is irrelevant.

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.

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.

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.

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.

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.

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.