Principal Issues: Can private corporation shares be contributed to a TFSA?
Position: Shares of a specified small business corporation, provided they are not a prohibited investment, are a qualified investment for a TFSA. In-kind contributions are permitted to TFSAs and must be at FMV and subject to the TFSA holder's unused TFSA contribution room. As per the Dept. of Finance News Release on Oct. 16, 2009, asset transfer transactions (swaps) are not permitted after the date of the news release.
Reasons: Subsection 4900(14) of the Income Tax Regulations.
XXXXXXXXXX 2009-030550 G. Allen October 30, 2009
Dear XXXXXXXXXX :
Re: In-kind Transfer to Tax-Free Savings Account (TFSA)
This letter is in reply to your email sent January 7, 2009 concerning whether a transfer of shares of a private corporation to a TFSA is a qualified investment for a TFSA.
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 Ruling", 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.
In general, the types of investments that are qualified investments for a TFSA are similar to those that are qualified investments for a registered retirement savings plan (RRSP). Concerning shares of private corporations, subsection 4900(14) of the Income Tax Regulations states, in general, that a share of a corporation that is a specified small business corporation and that is not a prohibited investment as defined in subsection 207.01(1) of the Income Tax Act, at the time the share is acquired by a trust governed by a TFSA, will be a qualified investment for a TFSA. In general, a specified small business corporation is a Canadian corporation that uses all or substantially all of the corporation's assets principally in an active business carried on primarily in Canada. The CRA's position is that "all or substantially all" means 90% or more.
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.
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