7 March 2005 External T.I. 2004-0099351E5 - SBIT holds shares in corp employing RRSP annuitant

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: Is an SBIT a qualified investment of an RRSP where the SBIT holds shares in a corporation which employs the annuitant of the RRSP.

Position: Question of fact. However, the particular fact as outlined in the principal issue would not, and of itself, prevent the SBIT from being a qualified investment of the RRSP.

Reasons: There are no specific provisions in the Act that prevent this type of situation. However, subsection 4900(8) of the Regulations must be considered.

XXXXXXXXXX 2004-009935
J. Gibbons, CGA
March 7, 2005

Dear XXXXXXXXXX:

Re: Small Business Investment Trusts

This is in reply to your email dated November 26, 2004, concerning whether a particular interest in a "small business investment trust" ("SBIT") as defined in subsection 5103(1) of the Income Tax Regulations (the "Regulations") is a qualified investment of a trust governed by a registered retirement savings plan ("RRSP"). More specifically, you are concerned with the situation where an RRSP owns an interest in an SBIT which in turn has invested in shares of a corporation that employs the annuitant of the RRSP.

Since your situation appears to relate to actual proposed transactions, we refer you to our policy in this regard, which is set out in Information Circular IC 70-6R5. As stated therein, it our policy not to provide written confirmation of the tax implications inherent in particular transactions unless an advance income tax ruling is requested in the manner set out in that circular. Nonetheless, we have provided you with general comments below.

Paragraph 4900(6)(c) of the Regulations provides that, subject to subsections 4900(8) and (9) of the Regulations, an interest in an SBIT is a qualified investment of an RRSP. Subsection 4900(8) concerns, among other things, the situation where an RRSP holds an interest in an SBIT which in turn has invested in shares of a corporation employing the annuitant of the RRSP, whereas subsection 4900(9) provides for special rules that must be met in certain situations, including the situation where an RRSP holds an interest in SBIT that in turn holds a share of a corporation of which the RRSP annuitant is a designated shareholder.

The fact that an RRSP holds an interest in an SBIT which in turn has invested in shares of a corporation employing the annuitant of the RRSP would not, in and of itself, prevent the interest in the SBIT from being a qualified investment of the particular RRSP. However, under subsection 4900(8) of the Regulations, the interest in the SBIT will cease to be a qualified investment of the RRSP if it can reasonably be considered, having regard to all the circumstances (including the terms and conditions of the share or of any related agreement, and the rate of interest or the dividend provided on the share), that any amount received in respect of the shares is on account, in lieu or in satisfaction of payment for the services provided by the annuitant to the corporation or a related person. The interest in the SBIT will cease to be a qualified investment immediately before the payment is received and will not be a qualified investment for the RRSP thereafter.

Whether the conditions in subsection 5103(1) of the Regulations are met by a particular trust or whether subsection 4900(8) or (9) of the Regulations apply to a particular RRSP's interest in an SBIT are questions of fact that can only be determined following an in-depth review of the situation. If you have a specific proposed transaction in mind, we would be pleased to consider the foregoing issues in the context of an advance income tax ruling.

We trust that these comments will be of assistance.

Yours truly,

Roxane Brazeau-LeBlond, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate

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