Principal Issues: Whether subsection 159(1) applies to an issuer of a TFSA
Position: An issuer could be held liable for a trust's Part I tax under subsection 146.2(6), pursuant to subsection 159(1) as well as pursuant to subsection 104(1).
Reasons: From the s. 248(1) definition of "legal representative", an issuer of a TFSA, governed by a trust, is considered to be the legal representative of the TFSA trust, and subsection 104(1) equates the trustee with a trust.
XXXXXXXXXX 2011-040553 Richard Aronoff 613-941-7239
Attention: XXXXXXXXXX
September 22, 2011
Dear XXXXXXXXXX :
Re: Application of Subsection 159(1) to TFSAs
This is in reply to your email of May 5, 2011 concerning whether subsection 159(1) of the Income Tax Act would apply to an issuer of a tax free savings account (TFSA) to be vicariously liable for the tax liability of a TFSA trust, and whether any other provision of the Act would cause the issuer of a TFSA to be liable for the tax liability of a TFSA trust. The letter states that your client offers TFSAs governed by a specimen agreement in the form of a declaration of trust.
A TSFA trust could be liable for tax under Part I on its taxable income pursuant to subsection 146.2(6) where at any time in the taxation year it carried on a business or held one or more properties that were non-qualified investments. With respect to the Part I tax pursuant to subsection 146.2(6), the Crown will look to the trustee for any outstanding liability of the trust pursuant to subsection 104(1). Reference to a trust is, generally, deemed to include a reference to a trustee having ownership or control of the property. As subsection 104(1) equates the trustee with a trust, any liability under the Act in respect of a trust becomes the liability of the trustee, for the purposes established in this subsection.
The definition of "legal representative" of a taxpayer in subsection 248(1) includes a trustee administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with the property that belongs or belonged to, or that is or was held for the benefit of, the taxpayer. Based on the definition, an issuer of a TFSA, governed by a trust, is considered to be the legal representative of the TFSA trust. Consequently, the issuer could be held liable for the Part I tax owing by the TFSA trust, not only pursuant to subsection 104(1), but also vicariously pursuant to subsection 159(1).
Should you have any queries or require additional information in regard to this matter, please do not hesitate to contact Richard Aronoff at the telephone number provided at the outset of this letter.
Yours truly,
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate