Principal Issues: Whether a beneficiary of and/or a contributor to or under a section 146.1 Registered Education Savings Plan or a section 146.4 Registered Disability Savings Plan is a person affiliated with the particular registered plan.
Position: General comments provided.
Reasons: Question of fact.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE
Question 14 - Persons affiliated with an RESP or an RDSP
The concept of "affiliated persons" is defined in section 251.1. This concept is particularly relevant where a loss arises from a transaction between affiliated persons, as there are several mechanisms in the Income Tax Act to prevent the recognition of a loss in such a transaction.
For many individuals, the concept of "superficial loss", defined in section 54, is a barrier to the realization of deductible capital losses on the disposition of investments. Generally, a superficial loss is a loss from the disposition of a particular property where during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (the “substituted property”) that is, or is identical to, the particular property, and at the end of that period, the taxpayer or a person affiliated with the taxpayer still owns the substituted property. Subparagraph 40(2)(g)(iv) is another example of a tax rule that restricts the recognition of a capital loss on transfers to certain registered plans.
An individual may own more than one investment vehicle. Whether it is a non-registered account, a registered retirement savings plan ("RRSP" or a locked-in retirement account, "LIRA"), a registered retirement income fund ("RRIF" or a life income fund, "LIF") or even a tax-free savings account ("TFSA"), there are a wide variety of investment vehicles, some of which are registered with the government. This is also the case for the registered education savings plan ("RESP") and the registered disability savings plan ("RDSP").
Although only capital losses realized in a non-registered portfolio are deductible, it is important to identify which investment vehicles are affiliated with an individual. In fact, the purchase of securities through registered vehicles that are affiliated with the individual results in the application of the superficial loss concept and the loss realized by the individual in the individual’s non-registered portfolio will be denied if the individual’s RRSP or RRIF has acquired the same security or an identical security.
By virtue of the rules set out in section 251.1, an individual is affiliated with himself or herself, and with the individual’s RRSP (and LIRA), RRIF (and LIF) and TFSA. In addition, the individual is also affiliated with the individual’s spouse, and the RRSP (and LIRA), RRIF (and LIF) and TFSA of the individual’s spouse.
Thus, an individual who realizes a capital loss in the individual’s non-registered portfolio will not be able to claim a deductible capital loss if the same security that caused the loss was acquired by the individual or the individual’s spouse through one of the previously named investment vehicles (non-registered account, RRSP, LIRA, RRIF, LIF and TFSA) in the 61-day period noted above.
An RESP is a registered plan in which a contributor deposits funds that will generate a return that will ultimately be paid to a beneficiary to help cover the cost of the beneficiary’s education. Generally, one sees RESPs, whose subscribers are parents or grandparents, that are for the benefit of their children/grandchildren.
An RDSP is a registered plan that allows a contributor to deposit funds that will generate a return that will ultimately be paid to a beneficiary with a severe and prolonged impairment in physical or mental functions to help the beneficiary pay for the cost of living related to the beneficiary’s condition. Unlike an RESP, however, contributions cannot be returned to contributors and ultimately belong to the beneficiary.
Although the rules for the concept of "affiliated persons" are defined in section 251.1, an RESP and an RDSP have several characteristics specific to them that make it difficult to identify all persons affiliated with such plans.
Questions to the CRA
Given the unique characteristics of each of these plans, can the CRA provide more details respecting affiliated persons to an RESP and an RDSP by answering in particular the following questions:
i. Is it the contributor to an RESP or instead the beneficiary who is affiliated with that plan, or potentially both?
ii. Is the answer the same where it is a family-type rather than an individual RESP?
iii. Is it the contributor to an RDSP who is affiliated with that plan, or is it the beneficiary?
CRA Response
First, the question of whether persons are affiliated under section 251.1 requires an analysis of all the facts and circumstances pertaining to a particular situation. Given that the statement in this question contains very little information, including information about the taxpayer subject to the superficial loss rules, the type of property disposed of by the taxpayer and the other taxpayer who acquired the property, we will limit ourselves to making the following general comments.
On the one hand, subparagraph 251.1(1)(g)(ii) provides that a person and a trust are affiliated persons or persons affiliated with each other where the person is a “majority-interest beneficiary” of the trust. In this regard, the definition of "beneficiary" in subsection 251.1(3) provides that a beneficiary under a trust includes a person beneficially interested in the trust. Note that the term "beneficially interested" is defined in subsection 248(25) and has a very broad reach.
Furthermore, subsection 251.1(3) also provides that a "majority-interest beneficiary" of a trust is, in broad terms, a person in respect of whom the full FMV of the person’s interest as an income or capital beneficiary of the trust, and of the interests as an income or capital beneficiary of the trust of persons with whom the person is affiliated, is greater than 50% of the FMV of all the interests as an income or capital beneficiary of the trust.
On the other hand, subparagraph 251.1(1)(g)(ii) provides that a person and a trust are affiliated if the person would be affiliated with a majority-interest beneficiary of the trust in the absence of paragraph 251.1(1)(g). For example, since a majority-interest beneficiary and the beneficiary’s spouse are affiliated persons pursuant to paragraph 251.1(1)(a) and, consequently, they would be affiliated with each other in the absence of paragraph 251.1(1)(g), it follows that that the spouse and such trust would be affiliated persons.
Thus, and in respect of a trust governed by an RESP ("RESP Trust"), the beneficiary (that is, the person designated by a subscriber to whom or on whose behalf it is agreed that an education assistance payment is made by virtue of the RESP Trust) and that trust would generally be affiliated if the beneficiary of the RESP Trust should be a majority-interest beneficiary respecting such trust.
Assuming that, by virtue of the RESP Trust arrangement, the subscriber may be entitled to receive "accumulated income payments" and/or "refunds of payments", we are of the view that such subscriber would generally be beneficially interested by virtue of subsection 248(25). If it turns out that that by virtually of being beneficially interested the subscriber qualifies as a majority-interest beneficiary of the RESP Trust, the subscriber would be affiliated with the RESP Trust.
It should be noted that subparagraph 251.1(4)(d)(i) provides that in determining whether a person is affiliated with a trust, if the amount of income or capital of the trust that a person may receive as a beneficiary under the trust depends on the exercise by any person of, or the failure by any person to exercise, a discretionary power, that person is deemed to have fully exercised, or to have failed to exercise, the power, as the case may be. Thus, in certain circumstances, a subscriber and a beneficiary of an RESP Trust could each be a majority-interest beneficiary of that trust and, consequently, be affiliated with it, inter alia, by virtue of subparagraph 251.1(1)(g)(i).
In the case of a so-called family plan, that is, an RESP Trust allowing the subscriber, subject to certain conditions, to appoint more than one beneficiary, each beneficiary will generally be deemed to be a majority-interest beneficiary of the RESP Trust pursuant to subparagraph 251.1(4)(d)(i) and will generally be affiliated with the RESP Trust.
Similarly, any person that would be affiliated with a majority-interest beneficiary of an RESP Trust in the absence of paragraph 251.1(1)(g), should generally be affiliated with that RESP Trust.
With respect to a trust governed by an RDSP ("RDSP Trust"), which plan must be administered exclusively for the benefit of its sole beneficiary, that is, generally an individual in respect of whom an amount is deductible pursuant to the credit for mental or physical impairment provided in section 118.3, the beneficiary will generally qualify as a majority-interest beneficiary and, consequently, will be affiliated with the RDSP Trust.
Finally, any person who would be affiliated with a majority-interest beneficiary in a particular RDSP Trust in the absence of paragraph 251.1(1)(g), should generally be affiliated with such trust.
Jean Lafrenière
(613) 941-2956
October 5, 2012
2012-045318