Section 207.04 — Income Tax Act: Tax payable on prohibited or non-qualified investment

The controlling individual of a registered plan that governs a trust shall pay a tax under this Part for a calendar year if, at any time in the year, the trust acquires property that is a prohibited investment, or a non-qualified investment, for the trust. The amount of tax payable in respect of each property described in subsection (1) is 50% of the fair market value of the property at the time referred to in that subsection. For the purposes of this section and subsections 146(10.1), 146.1(5), 146.2(6), 146.3(9), 146.4(5), 146.6(3) and 207.01(6), if a trust governed by a registered plan holds property at any time that is, for the trust, both a prohibited investment and a non-qualified investment, the property is deemed at that time not to be a non-qualified investment, but remains a prohibited investment, for the trust. If in a calendar year a trust governed by a registered plan disposes of a property in respect of which a tax is imposed under subsection (1) on the controlling individual of the registered plan, the controlling individual is entitled to a refund for the year of an amount equal to except where paragraph (b) applies, the amount of the tax so imposed; or nil, if it is reasonable to consider that the controlling individual knew, or ought to have known, at the time the property was acquired by the trust, that it was, or would become, a property described in subsection (1), or if the property is not disposed of by the trust before the end of the calendar year following the calendar year in which the tax arose, or any later time that the Minister considers reasonable in the circumstances. If more than one person is entitled to a refund under subsection (4) for a calendar year in respect of the disposition of a property, the total of all amounts so refundable shall not exceed the amount that would be so refundable for the year to any one of those persons in respect of that disposition if that person were the only person entitled to a refund for the year under that subsection in respect of the disposition. If the persons cannot agree as to what portion of the refund each can so claim, the Minister may fix the portions. Each person who is a holder of a RDSP or a subscriber of a RESP at the time that a tax is imposed under subsection (1) in connection with the plan is jointly and severally, or solidarily, liable to pay the tax. For the purposes of this section and subsections 146(10.1), 146.1(5), 146.2(6), 146.3(9), 146.4(5) and 146.6(3), a right received by a lender under a securities lending arrangement is deemed not to be a non-qualified investment for a trust if the security lent or transferred under the arrangement is described in paragraph (d) of the definition qualified investment in section 204; the lender under the arrangement is the trust; the borrower under the arrangement is a registered securities dealer resident in Canada; it is reasonable to conclude that the controlling individual of the registered plan that governs the trust neither knew nor ought to have known that the security lent or transferred under the arrangement (or property substituted for it) would be, while lent or transferred under the arrangement, received by a person who does not deal at arm’s length with the controlling individual of the registered plan that governs the trust; the trust has a right under the arrangement to require the borrower to transfer or return an identical security (within the meaning assigned by paragraph (b) of the definition securities lending arrangement in subsection 260(1)) at any time throughout the period described in paragraph (c) of that definition; property that is described in paragraph (a) or (b) of the definition qualified investment in section 204 that is of equivalent value to the security lent under the arrangement is held in trust for the benefit of the lender and is to be distributed to the lender in the event that an identical security (within the meaning assigned by paragraph (b) of the definition securities lending arrangement in subsection 260(1)) is not transferred or returned to the lender under the arrangement; and the controlling individual of the registered plan that governs the trust is provided written disclosure of the arrangement and consents to the arrangement prior to the time it is entered into.