10 February 2000 External T.I. 1999-0013775 - CCPC SHARES QUALIFIED INVESTMENT

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: Will shares of a certain private corporation be qualified investments for an RRSP?

Position: Question of fact.

Reasons: We need to see all of the facts to determine whether the shares would meet 4900(6) or (12) of the Regulations.

XXXXXXXXXX 1999-001377
M. P. Sarazin
February 10, 2000

Dear Sir:

Re: Qualified Investment for a Registered Retirement Savings RRSP

This is in response to your letter dated November 12, 1999, wherein you requested confirmation that shares of a particular private corporation would be qualified investments for a registered retirement savings plan ("RRSP").

You and several other individuals are proposing to incorporate a company that will acquire a building and operate a food service business. One investor will manage the business (the "Manager"). The food service business will occupy approximately 15% of the building space and the balance of the building space will be leased to other businesses. All of the individuals, other than the Manager, will acquire their shares in the company through their self-directed RRSPs. Individuals who acquire shares through their RRSPs will be restricted to a maximum of less than 10% ownership of the company.

Comments

We cannot confirm whether specific shares are qualified investments for an RRSP except in the context of an advance income tax ruling. Even then, the determination of whether 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 of 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. Please refer to the current version of IC 70-6 Advance Income Tax Rulings for instructions on how to apply for an advance income tax ruling. Copies of Information Circulars and Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

Generally, an annuitant of an RRSP may rely on the trustee or an agent for the trustee of a self-directed RRSP to make such a determination at the time of purchase. The following is an overview of the rules respecting RRSP investments in shares of a corporation for your information. Please note that these comments are general in nature. Specific reference should be made to the Income Tax Act (the "Act") and the Income Tax Regulations (the "Regulations").

Generally, an RRSP can invest in shares of a corporation if the shares are listed on a prescribed stock exchange in Canada or in a country other than Canada, or if the corporation is a "public corporation" as defined in the Act - please refer to the current version of IT-391 Status of Corporations for a discussion of public corporation status. It should be noted that for purposes of the Act, life insurance corporations are considered to be public corporations.

When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify under paragraph 4900(6)(a) of the Regulations if the corporation is an "eligible corporation" or under paragraph 4900(12)(a) of the Regulations if the corporation is a "small business corporation". These terms are defined in the Act and Regulations and are discussed in greater detail below. A corporation may frequently satisfy the conditions in paragraph 4900(12)(a) but not meet the conditions in paragraph 4900(6)(a). However, it is only necessary to satisfy one of the provisions.

Paragraph 4900(6)(a) of the Regulations

Under paragraph 4900(6)(a) of the Regulations, shares of an eligible corporation (as defined in subsection 5l00(1) of the Regulations) would be a qualified investment for a RRSP if the annuitant under the RRSP is not a "designated shareholder" (as defined in subsection 4901(2) of the Regulations).

An "eligible corporation" is generally a taxable Canadian corporation which uses all or substantially all (90% or more) of its property in a "qualifying active business". Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt, and corporations controlled by non-residents.

A "qualifying active business" is also a defined term which generally includes a retail or wholesale business and any business which is carried on in Canada except one where the principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property. A corporation's business will be considered to have been carried on in Canada if at least 50% of its employees are engaged in the business in Canada or at least 50% of its salaries or wages are paid for services provided in Canada in respect of the business.

If the corporation is part of a group of related corporations, the combined services of their employees and the combined salaries and wages paid must be considered in making this determination.

With respect to property acquired by an RRSP after November 29, 1994, a "designated shareholder" of a corporation is any RRSP annuitant who at the time

(a) is, or is related to, a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation), unless the annuitant or related person deals at arm's length with the corporation and the cost amount of all the shares is, in total, less than $25,000. By virtue of paragraph (a) of the definition of "specified shareholder" in subsection 248(1) of the Act, an annuitant of a RRSP is deemed to own any shares owned by non-arm's-length persons, and also, because of paragraph (b) of the definition of "specified shareholder" in subsection 248(1) of the Act, any shares owned by the RRSP. In addition, any share that the RRSP annuitant or a non-arm's-length person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.3) of the Regulations);

(b) is or is related to a member of a partnership that controls the corporation in any manner;

(c) is or is related to a beneficiary under a trust that controls the corporation in any manner;

(d) is or is related to an employee of the corporation where the employees control the corporation, except where the corporation is controlled by one person or a related group of persons; or

(e) does not deal at arm's length with the corporation.

The conditions respecting both the "eligible corporation" and the "designated shareholder" must be satisfied at the time the RRSP acquires the shares and thereafter. Should the annuitant become a "designated shareholder" of the corporation or the corporation fail to be an "eligible corporation" at a later date, the shares will no longer be qualified investments for the RRSP under paragraph 4900(6)(a) of the Regulations.

In accordance with subsection 4900(8) of the Regulations, a share of an "eligible corporation" will become non-qualified, however, if the annuitant provides services to or for the issuer of the share or a person related to the issuer and an amount is received in respect of the share that can reasonably be considered to be on account, in lieu or in satisfaction of payment for the services.

Paragraph 4900(12)(a) of the Regulations

Under paragraph 4900(12)(a) of the Regulations, shares of a corporation (other than a cooperative corporation) that would, at the time of acquisition or at the end of the last taxation year of the corporation ending before that time, be a small business corporation are qualified investments for a RRSP if immediately after the time the shares were acquired by the RRSP the annuitant under the RRSP was not a "connected shareholder" of the corporation. The expression "connected shareholder" has the meaning assigned by subsection 4901(2) of the Regulations.

For the purposes of paragraph 4900(12)(a) of the Regulations, a "small business corporation" has the meaning assigned by subsection 248(1) of the Act if the reference therein to "Canadian-controlled private corporation" is read as "Canadian corporation (other than a corporation controlled at that time, directly or indirectly in any manner whatever, by one or more non-resident persons)". In addition, to qualify as a "small business corporation" all or substantially all (90% or more) of the fair market value of the corporation's assets must be attributable to assets that are:

(a) used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares or indebtedness of other small business corporations that are connected with the particular corporation, or

(c) assets described in (a) and (b) above.

For the purposes of these requirements, an "active business" is, in general, defined as any business carried on by a taxpayer other than a "specified investment business" or a "personal services business". A "specified investment business" is defined as a business the principal purpose of which is to derive income from property including such income as interest, dividends, rent and royalties. Gains from the disposition of real property may or may not be from an active business. Please refer to the current version of IT-73 The Small Business Deduction for more information on these topics.

It is important to note that the shares of a small business corporation must qualify at the time they are acquired by an RRSP. Shares of a newly-formed corporation will not generally qualify prior to the start of an active business. With respect to property acquired by an RRSP after November 29, 1994, a "connected shareholder" of a corporation is a person who is a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation), unless the annuitant deals at arm's length with the corporation and the cost amount of all the shares is, in total, less than $25,000. For this purpose, an annuitant of an RRSP is deemed to own any shares owned by non-arm's-length persons and any shares owned by the RRSP (see paragraphs (a) and (b) of the definition of "specified shareholder" in subsection 248(l) of the Act). In addition, any share that the RRSP annuitant or a non-arm's-length person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.2) of the Regulations).

Note that the conditions respecting the "small business corporation" must be satisfied only at the time the shares are acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired. Similarly, the conditions respecting the "connected shareholder" must be satisfied only once, at the time immediately after the shares are acquired by the RRSP. Should the corporation fail to remain a "small business corporation" or the annuitant become a "connected shareholder" at a later time, the shares will not consequently become non-qualified investments for the RRSP.

In accordance with subsection 4900(13) of the Regulations, a share of a "small business corporation" will become non-qualified, however, if:

(i) an individual provides services to or for, acquires goods from, or is provided services by, the issuer of the share or a person related to the issuer;

(ii) an amount is received by the RRSP in respect of the share; and

(iii) the amount can reasonably be considered to be

(A) on account of, or in lieu or in satisfaction of, payment for the services to or for the issuer or the person related to the issuer, or

(B) in respect of the acquisition of the goods from, or services provided by, the issuer or the person related to the issuer.

We trust these comments will be of assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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