Principal Issues: (1) Whether a property subject to an escrow agreement, being a unit consisting of one common share and one-half warrant, can be held by a trust governed by a TFSA, and if so, is an issuer required to permit the property to be held inside their particular arrangement. (2) How to determine the amount of the contribution into the TFSA, and in particular how to properly value the warrants.
Position: General comments provided.
Reasons: (1) Longstanding position set out in IT-320; (2) Property must be contributed at the property's FMV, which is a question of fact and an appropriate valuation method must be used in the particular circumstances. In the CRA's view, the intrinsic value of an option, warrant or similar right is not reflective of the option's, warrant's or similar right's FMV.
May 2, 2012
XXXXXXXXXX
Dear XXXXXXXXXX:
Thank you for your correspondence concerning your ability to make an in-kind contribution of a particular escrowed property (unit) to your tax-free savings account (TFSA). I apologize for the delay in replying.
Your example mentions that the unit consists of one common share and one-half of a warrant issued by the warrant issuer. You want to know if your financial institution has the discretion to refuse to permit your TFSA to hold the unit. You are also concerned about the appropriate valuation method to be used to value the warrant at the time of the contribution.
As noted in Guide RC4466, Tax-Free Savings Account (TFSA), Guide for Individuals, you can make an in-kind contribution (for example, securities you hold in a non-registered account) to your TFSA as long as the property is a qualified investment. The CRA will consider that you have disposed of the property at its fair market value (FMV) at the time of the contribution. If the FMV is more than the cost of the property, you must report the capital gain on your income tax and benefit return. However, if the cost of the property is more than its FMV, you cannot claim the resulting capital loss. In this case, the CRA will consider the amount of the contribution to your TFSA to be equal to the property's FMV.
In your email of February 3, 2012, addressed to Mr. Jason R. Ward, a senior rulings officer at the Income Tax Rulings Directorate, you indicated you had determined that identical shares of the same corporation which are not subject to an escrow agreement (free shares) are qualified investments for a TFSA. You can find the general views of the Canada Revenue Agency (CRA) concerning qualified investments in Interpretation Bulletin IT-320R3, Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds. As explained in paragraph 5 of the bulletin, a share of a corporation subject to an escrow agreement can be a qualified investment if:
- the share has been issued and not simply allotted to a plan trust;
- the shareholder has all the rights of ownership that every other shareholder has in relation to the issuer; and
- shares identical to the escrowed share that are not subject to an escrow agreement are qualified investments.
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, 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. Subsection 4901(2) of the Regulations defines the term "connected person" and includes in the definition the holder of a TFSA or any person who does not deal at arm's length with the holder of the TFSA.
When an individual contributes property, such as a warrant, to his or her TFSA, the property must be contributed at its FMV and the contribution is subject to the holder's unused TFSA contribution room. The FMV of a particular warrant is determined based on facts. The CRA's view is that the intrinsic value (that is, the amount, if any, by which the current market price of the share exceeds the exercise price) of a warrant is not reflective of the property's FMV; rather, it is the CRA's view that a valuation method appropriate in the circumstances should be used to determine the FMV of a warrant, option, or similar right.
While the income tax legislation lists the types of investments that are qualified investments for a TFSA, financial institutions issuing TFSAs can have internal policies which limit the type of qualified investments that can be held in the TFSAs they issue. The legislation does not prevent the financial institutions from having such policies.
I trust that the information I have provided is helpful.
Yours sincerely,
Gail Shea, P.C., M.P.
Minister of National Revenue
Jason R. Ward
613-957-9769
2012-043381