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: Whether shares of private Canadian corporation are qualified investments for RRSP
Position: Question of fact
Reasons: Discussion of portions of 4900(6), (12) and (13) requirements which may or may not be relevant to particular investment.
XXXXXXXXXX 1999-001378
S. E. Thomson
Attention: XXXXXXXXXX
January 28, 2000
Dear XXXXXXXXXX:
Re: Shares of XXXXXXXXXX as qualified investments for an RRSP
This is in reply to your letter of December 6, 1999, and subsequent telephone conversation (Thomson/XXXXXXXXXX) in which you ask if shares of XXXXXXXXXX qualify as investments for an RRSP trust (hereinafter referred to as a "Plan"). XXXXXXXXXX. Since the corporation is not expected to be profitable for the first few years, the investors may be called upon to guarantee the debts of the corporation.
We cannot confirm whether specific shares are qualified investments for a Plan 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 beforehand. Please refer to
IC 70-6R3 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.
We refer you to our document E9912145 (which has been faxed to you) for a general overview of the rules regarding investments in the shares of a small business as outlined in paragraphs 4900(6)(a) and 4900(12)(a) of the Income Tax Regulations (the "Regulations"). In addition, the investment may qualify under paragraph 4900(12)(b) as a prescribed venture capital corporation, although you have not indicated that this is your intention.
We offer the following general comments which may be relevant to your situation. Please note that these comments are not binding on the Canada Customs and Revenue Agency.
A share qualifying under paragraphs 4900(6)(a) and 4900(12)(a) of the Regulations must be a share of a corporation that is involved in an active business. For these purposes, an active business does not include a business, the principal purpose of which is to derive income (including rent) from property. Whether or not the corporation would be carrying on an active business is a question of fact, although we have stated in the Special Release to IT-434R Rental of Real Property by Individual that the operator of a motel would normally be considered to be carrying on a business
Where a share of a corporation qualifies under subsection 4900(12) of the Regulations, the investment will be disqualified if any of the conditions in subsection 4900(13) are applicable. For example, where an individual provides services to the corporation, or vice-versa, and an amount is received by the Plan (for example, as a dividend from the corporation) that was in lieu of payment for those services, subsection 4900(13) will apply to make the share a non-qualified investment.
Finally, we point out that, pursuant to subsection 146(10) of the Act where a Plan uses or permits to be used any property of the Plan as security for a loan, the fair market value of the property used as security will be included in computing the income of the annuitant. For example, if the shares owned by the Plan are pledged as security, the value of the shares will be taxable to the annuitant. The annuitant may be entitled to a deduction for this amount under subsection 146(7) where the property is no longer used as or permitted to be used as security.
We trust that the above comments will assist.
Yours truly,
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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