Principal Issues: 1. Whether the arrangement would qualify as a tax-free savings account? 2. Whether the attribution rules would apply in the situations described in the letter?
Position: 1. No. 2. Possibly.
Reasons: 1. 146.2(2)(c) - contribution to the trust by a person other than the holder. 2. 74.5(12)(c) not applicable.
XXXXXXXXXX 2009-030986 R. Gagnon October 23, 2009
Dear Sir,
Subject: Tax-Free Savings Account
This is in response to your letter of February 10, 2009 in which you asked us questions regarding the application of the attribution rules to the scenarios described below.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Facts and assumptions
Scenario 1
1. Mr. X and Ms. X are individuals who are resident in Canada for the purposes of the Act.
2. Ms. X is the wife of Mr. X. Ms. X and Mr. X are of the age of majority.
3. Ms. X intends to enter into an arrangement with an issuer that will be a "qualifying arrangement" (as defined in subsection 146.2(1)) and a "tax-free savings account" ("TFSA") (as defined in subsection 146.2(3)). The arrangement will be an arrangement in trust as described in subparagraph (b)(i) of the definition of qualifying arrangement in subsection 146.2(1).
4. Ms. X will be the "holder" of the arrangement as defined in subsection 146.2(1).
5. It is expected that Mr. X will make a contribution of $5,000 in 2009 in connection with the arrangement to be held by Ms. X. This will be the only contribution to be made under the arrangement.
6. The amount of $5,000 will be used in the arrangement to purchase a "qualified investment" as defined in subsection 207.01(1). Income from the investment will constitute income from property for the purposes of the Act.
7. At some time in 2011, Ms. X will withdraw all of the amounts (as defined in subsection 248(1)) held under the arrangement. The fair market value of the amounts will then be $10,000. The arrangement will then cease to exist.
8. It is expected that Ms. X will immediately use the amounts received ($10,000) to acquire a property ("Property Y") that will generate income from property.
Scenario 2
1. The facts and assumptions described in paragraphs 1 to 6 of Scenario 1 above are also applicable to Scenario 2.
2. Paragraph 7 of Scenario 2 is as follows:
At some time in 2011, Ms. X will withdraw an amount (as defined in subsection 248(1)) of $5,000 held under the arrangement. The fair market value of the amounts held in the arrangement immediately after the withdrawal will be $10,000.
3. Paragraph 8 of Scenario 2 is as follows:
It is expected that Ms. X will immediately use the $5,000 to acquire a property ("Property Z") that will generate income from property.
Your Questions
1. Will subsection 74.1(1) apply in respect of Ms. X's property income from Property Y in Scenario 1?
2. If Question 1 is answered in the affirmative, will subsection 74.1(1) apply in respect of all of the income from Property Y or only on the portion (50%) of the income attributable to the original $5,000 contribution of $5,000?
3. In Scenario 2, will subsection 74.1(1) apply in respect of Ms. X's property income from Property Z?
4. If Question 3 is answered in the affirmative, to what portion of the income from property will subsection 74.1(1) apply?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 Advance Income Tax Rulings of May 17, 2002, it is our practice not to provide written opinions with respect to proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of its review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Subsection 146.2(2) provides that a qualifying arrangement prohibits anyone other than the holder from making contributions under the arrangement. Subsection 146.2(3) [now 146.2(5)] provides that an arrangement ceases to be a TFSA immediately before the earliest of the three times referred to in paragraphs 146.2(3)(a) to (c). Paragraph 146.2(3)(c) refers to the time when the arrangement is not administered in accordance with the conditions set out in subsection 146.2(2).
It appears to us that an arrangement ceases to be administered in accordance with the provisions of subsection 146.2(2) at the time a contribution is made by a person other than the holder. Consequently, if arrangements in the situations described above would otherwise qualify as qualifying arrangements in the situations presented, subsection 146.2(3) would cause the arrangements to cease to be TFSAs immediately before the contribution by Mr. X.
The exception in paragraph 74.5(12)(c) is not applicable in the scenarios described above.
It appears to us that subsection 74.1(1) could apply in the scenarios described above. However, the facts available do not permit us to determine precisely to which amounts subsection 74.1(1) would apply.
Please note that this opinion is not an advance income tax ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA.
Best regards,
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.