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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Is the writing of a put option by a registered plan (RRSP, RESP or RRIF) permissible?
Position:
Yes, however any margin may not be a qualified investment.
Reasons:
Cash that is legal tender is a qualified investment as per paragraph (a) of the def'n of "qualified investment" in section 204 of the Act. Margin left for any period of time would not be a deposit as defined in the CDIC Act.
XXXXXXXXXX 2001-010183
P. Kohnen
October 12, 2001
Dear XXXXXXXXXX:
Re: Use of Put Options in Registered Accounts
This is in reply to your letter of September 18, 2001, requesting our views regarding the permissibility of the writing of a put option by a registered account.
The scope of our commentary will be confined to the permissibility of writing put options by the following registered plans: registered retirement savings plans ("RRSPs"), registered educational savings plans ("RESPs") and registered retirement income funds ("RRIFs"). The definitions of "qualified investment" for the above plans are contained in subsections 146(1), 146.1(1) and 146.3(1) of the Income Tax Act (the "Act"), respectively, and in Part XLIX of the Income Tax Regulations (the "Regulations").
A put option is an agreement under which the writer agrees to purchase the underlying security at an agreed-upon price, within a specified time period, should the holder of the option elect to exercise their right to sell. As was noted during our telephone conversation of September 18, 2001 (XXXXXXXXXX/Kohnen), a registered plan that writes a put option is not acquiring a property other than the cash received on the sale of the option, which, if it is legal tender, will be a qualified investment, in accordance with paragraph (a) in the definition of "qualified investment" in section 204 of the Act.
Note that the fact that the trust may enhance its risk protection by increasing its cash reserves through the writing of put options is not a factor that assists in determining whether or not the rules governing qualified investments in the Act are met. Any property acquired or held by a registered plan must be a property that is listed in the respective definitions of "qualified investment" in subsections 146(1), 146.1(1) and 146.3(1), or the additional properties prescribed by section 4900 of the Regulations. If it is not a property that meets the definition of a qualified investment, then its acquisition or ownership by the registered plan will give rise to adverse tax consequences.
It should be noted that where the registered plan which writes the put option is required to leave cash (margin) on deposit with a broker to cover the possible exercise of the option by the holder, such cash may not be a qualified investment. It is our view that if the cash were left on deposit for any length of time (i.e. longer than a few days), the deposit would not be a qualified investment by virtue of paragraph (a) in the definition of "qualified investment" in section 204 of the Act.
In regard to your comments petitioning the holding of put options in registered plans, it should be noted that a put option is not a qualified investment. A plan that purchases a put option acquires a right to sell securities at an agreed-upon price. This right to dispose of property is not a qualified investment, as defined in the Act or Regulations. As was discussed by telephone (XXXXXXXXXX/Kohnen), should you wish to petition that a put option should be a qualified investment for a registered plan, you may wish to contact the Tax Policy Branch of the Department of Finance.
We trust that the above comments are of assistance. Please do not hesitate to contact Phillip Kohnen at (613) 957-2093 should you require further information.
Yours truly,
Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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