7 October 2010 External T.I. 2009-0308231E5 - Qualified investments for TFSA

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Whether the shares of a Mortgage Investment Corporation ("MIC") are a prohibited investment for a trust governed by a Tax Free Savings Account ("TFSA"), where the holder of the TFSA owns directly or indirectly 10% or more of the shares of a MIC. 2) Whether a mortgage investment corporation can be an issuer of a TFSA?

Position: 1) Yes. 2) Provide general comments.

Reasons: 1) Pursuant to 207.01(1) of the Income Tax Act, where a TFSA holds investments in entities with which the holder of a TFSA does not deal at arm's length, including entities with which the TFSA holder has a significant interest, the investment will be a prohibited investment. 2) Wording of paragraph 146.2(1)(b).

XXXXXXXXXX 		 		 				2009-030823												Gillian Godson
									(613) 957-9229
October 7, 2010

Dear XXXXXXXXXX ,

Re: Qualified Investments for a Tax Free Savings Account

This is in response to your e-mail of January 21, 2009, wherein you requested information on whether shares of a mortgage investment corporation ("MIC") are a qualified investment for a trust governed by a Tax Free Savings Account (TFSA), and whether a mortgage investment corporation can be an issuer of a TFSA.

We cannot confirm whether specific shares are qualified investments for a Plan except in the context of an advanced income tax ruling. Even then, the determination of whether the shares of a particular corporation are qualified investments is a question of fact that can only be determined on a case-by-case basis and after a review of all the facts. Therefore, we can provide an advance income tax ruling on the qualification of any particular shares only where the facts can be ascertained before hand. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. The following comments are, therefore of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.

The CRA's general views concerning qualified investments are contained in Interpretation Bulletin IT-320R3, "Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds."

In general, paragraph 4900(1)(c) of the Income Tax Regulations (the "Regulations") allows a share of a MIC to be a qualified investment for a trust governed by a TFSA provided the MIC does not hold as part of its property any indebtedness of a person who is a connected person under the governing plan of the plan trust. Subsection 4901(2) of the Regulations defines a "connected person" and includes a holder of a TFSA or any person who does not deal at arm's length with the holder of the TFSA.

Pursuant to subsection 207.01(1) of the Income Tax Act (the "Act"), where the holder of the TFSA has a significant interest in the MIC, the investment in the MIC will be a prohibited investment for the TFSA. Pursuant to subsection 207.01(4) of the Act an individual has a significant interest in a corporation at any time if the individual is a specified shareholder of the corporation at that time. Subsection 248(1) of the Act defines a "specified shareholder" as a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of capital stock of the corporation or any other corporation that is related to the corporation. Consequently, if the holder of the TFSA owns directly or indirectly 10% or more of any class of shares of the MIC, the investment in the MIC will be considered a prohibited investment for the TFSA.

Where a trust governed by a TFSA acquired a prohibited investment, section 207.04 of the Act provides that the holder of the TFSA is liable for a special tax equal to 50% of the fair market value of the prohibited investment at the time the prohibited investment was acquired by the TFSA trust. This tax may be refundable if the prohibited investment is disposed of before the end of the calendar year following the calendar year in which the tax arose. However, no refund of this tax is available if it is reasonable to expect that the holder knew or ought to have known at the time the property was acquired by the TFSA trust that the property was, or would become, a prohibited investment.

In addition, any income earned on a prohibited investment is subject to a special tax payable by the holder of the TFSA. Under proposed amendments to the definition of "advantage" in subsection 207.01(1) contained in Bill C-47, such income will be considered an advantage and thus subject to a 100% tax under section 207.05 of the Act.

With respect to who is eligible to be an issuer of a TFSA, an "issuer" of a TFSA is the person described as the "issuer" in the definition of a "qualifying arrangement", pursuant to146.2(1) of the Act. In general, the definition of "qualifying arrangement" provides that Canadian trust companies, insurance companies, banks and credit unions can issue TFSAs.

We trust the above comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CA
for Director
Deferred Compensation Arrangements and Retirement Plans Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch