Principal Issues: What are the tax consequences where an "out-of-the-money" warrant is contributed to a TFSA?
Position: It is the CRA's position that the intrinsic value of a warrant is not reflective of a warrant's FMV and that a valuation method that is appropriate in the particular circumstances should be used to determine the FMV of a warrant. Property contributed to a TFSA must be contributed at its FMV and is subject to the TFSA holder's unused TFSA contribution room.
Reasons: The law and CRA's position concerning the FMV of property such as options, warrants or similar rights, where the property is contributed to a TFSA.
XXXXXXXXXX 2008-030379 G. Allen December 1, 2009
Dear XXXXXXXXXX :
Re: Warrants and the Tax-Free Savings Account (TFSA)
This letter is further to your email of December 12, 2008 concerning contributing warrants to a TFSA. Specifically, you enquire about situations where "out-of-the-market" warrants are contributed to a TFSA, i.e., where the exercise price to acquire the property that may be acquired by the holder of the warrant is greater than the property's fair market value (FMV).
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.
Pursuant to paragraph 4900(1)(e) of the Income Tax Regulations, a warrant is a qualified investment for a TFSA trust if it gives the holder of the warrant the right to acquire, either immediately or in the future, property that is a qualified investment. In general, the property that may be acquired by the holder of the warrant must be a share of, a unit of, a debt issued by, or certain warrants issued by the issuer of the warrant and the issuer cannot be a connected person in relation to the TFSA trust.
Where property such as a warrant is contributed by a taxpayer, the holder of a TFSA, to a TFSA, the property must be contributed to the TFSA at its FMV and the contribution is subject to the holder's unused TFSA contribution room. The FMV of a particular warrant is a question of fact. The CRA is of the view that the intrinsic value of a warrant, option, or similar right is not reflective of the property's FMV. Rather, it is the CRA's view that a valuation method that is appropriate in the circumstances should be used to determine the FMV of an option, warrant, or similar right.
On October 16, 2009 in a Finance Canada News Release, available at: http://www.fin.gc.ca/n08/09-099-eng.asp, proposed amendments were announced to prohibit asset transfer transactions (swaps) between TFSAs and other registered and non-registered accounts. This prohibition would apply to transfers effected 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. It is proposed that this measure apply to transactions occurring after the date of the news release. With respect to swap transactions involving TFSAs that may have occurred prior to October 17, 2009, the CRA will be examining any unusual TFSA transactions and applying the existing TFSA rules to challenge aggressive tax planning where appropriate.
In your email, you raise the possibility whether a transaction, where property with an intrinsic value of zero is contributed to a TFSA for no consideration, might result in an advantage as defined in subsection 207.01(1) of the Income Tax Act (the "Act"). In our view, it may not be reasonable to expect that in an open market where two taxpayers are dealing with each other at arm's length, that one taxpayer would dispose of, in your example 5,000 warrants, for no consideration. Accordingly, in our view, the provisions of subparagraph (b)(i) of the definition of "advantage" in subsection 207.01(1) of the Act may apply to this type of transaction.
We trust that our comments will be of assistance to you.
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch