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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
How should certain benefits received by the annuitant of an RRSP as a consequence of the RRSP holding shares of a corporation be treated for tax purposes where the benefit relates to investments held by the RRSP? What other tax consequences may arise?
Position:
The amount received will generally be treated as a benefit to the recipient under 146(8) of the Act. However it is also necessary to be determined how the shares qualify as an investment for an RRSP. Generally the shares could be shares listed on a prescribed stock exchange, be shares of a public corporation, be qualified under Regulation 4900(6) or under 4900(12). If they only qualify under Regulation 4900(6), then the conditions of 4900(8) must also be considered. Similarly the conditions of 4900(13) must be considered for shares that will only qualify under 4900(12).
Reasons:
"Benefit" in 146(1); 146(8); The intent of regulations 4900(8) and 4900(13).
October 27, 2000
VANCOUVER ISLAND TSO HEADQUARTERS
W. C. Harding
Attention: Gord Brown (613) 957-8953
2000-003502
Vacation Award Certificates Granted to RRSP Annuitant
This is in reply to your facsimile of June 29, 2000, in which you asked for our comments on the tax consequences inherent in the situation summarized below.
Facts:
1. A trust governed by a registered retirement savings plan (the "RRSP") holds shares of a venture capital corporation (the "VCC"). No information was provided on the VCC and, in particular, it is not confirmed that it is a venture capital corporation prescribed under any of sections 6700, 6700.1 or 6700.2 of the Income Tax Regulations (the "Regulations").
We have presumed for the purposes of this reply that because these shares are held in an RRSP, they are owned by the RRSP trustee and not by the annuitant of the RRSP as stated by your client's representative.
2. The VCC holds shares of XXXXXXXXXX ("Opco"). It is not known if Opco is dealing at arm's length with the VCC.
3. Opco distributed certificates to the VCC described as "XXXXXXXXXX" (the "Certificates"). XXXXXXXXXX.
4. The VCC distributed the Certificates to its shareholders. However, you indicate that, in the case being considered by you, the Certificates were distributed to the annuitant of the RRSP.
5. The VCC advised its shareholders that the Certificates are a gift and will not be recorded as a dividend distribution by the VCC.
Our first concern is whether the shares of the VCC were qualified investments for the RRSP trust at the time of their acquisition and at all subsequent times. However, we cannot conclusively determine if, or under what provision, a share of the VCC would qualify based on the information provided.
Shares of a corporation may be qualified investments for an RRSP trust under a number of provisions. In particular, the VCC shares could be qualified investments under:
- paragraph 4900(1)(b) of the Regulations if the shares are shares of a public corporation;
- paragraph 4900(6)(a) of the Regulations if the VCC is an "eligible corporation" as defined under subsection 5100(1) of the Regulations; or
- paragraph 4900(12)(a) of the Regulations if the VCC was a corporation described under that provision at the time the RRSP acquired the shares.
If it is determined that a share of the VCC is a qualified investment under paragraph 4900(6)(a) of the Regulations, it would then be necessary to consider if the provisions of subsection 4900(8) of the Regulations could apply to cause the shares to become non-qualified investments. This might occur if the annuitant of the RRSP provided any services to the VCC or to a person related to the VCC, which, as noted above, might include Opco. Based on the information provided there is no indication that the annuitant provided any services to either the VCC or Opco but you may wish to verify this.
Similarly, if it is determined that a share of the VCC only qualifies as a qualified investment under paragraph 4900(12)(a) of the Regulations, it would be necessary to consider the application of subsection 4900(13) of the Regulations. Basically, subsection 4900(13) provides (in part) that if:
- an individual is provided goods or services by the issuer of a share or by a person that is related to the issuer;
- the share is a qualified investment for an RRSP trust solely because of subsection 4900(12); and
- the RRSP trust receives an amount in respect of the share that relates to those services,
then the share will cease to be a qualified investment for the RRSP.
If it is determined the shares in question will only qualify under subsection 4900(12) of the Regulations, we will be pleased to provide comments on the application of 4900(13). However we would ask that all particulars of the transaction be provided for our consideration.
Our second concern is the treatment of the distribution of the Certificates to the annuitant of the RRSP.
It was noted in your submission that the VCC considers the amount to be a gift to the recipient shareholders. While we disagree with this statement, we would note that if the amount were in fact a gift to the RRSP as the shareholder, the payment could result in taxation in accordance with the provisions of Part X.1 of the Act - Tax in respect of Over-Contributions to Deferred Income Plans. Since in our opinion, the RRSP trust is the shareholder and the Certificates are provided to the annuitant of the RRSP, they are not a gift to the RRSP trust and Part X.1 will not apply in respect of them. However, the value of the Certificates should be included in the income of the annuitant as a benefit out of or under an RRSP in accordance with subsection 146(8) of the Act.
Our final concern relates to the nature of this distribution. In particular, it is our understanding that "XXXXXXXXXX" is a company that arranges XXXXXXXXXX and XXXXXXXXXX programs. XXXXXXXXXX. If it is found that the share of the VCC held in the RRSP entitles the annuitant to use the Opco facilities or other facilities through XXXXXXXXXX (apart from the awarding from time to time of Certificates), then the value of that use would also be considered a benefit payable to the annuitant out of the RRSP. However a determination of this cannot be made on the basis of the information presently available.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Agency's mainframe computer. A severed copy may also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they may be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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