8 February 2000 External T.I. 1999-0014505 - RPP PROHIBITED 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: Where an employer is in the business of providing investment counsel and money management and it provides its services to unit trusts (the units of which are held exclusively by RPPs), will the unit trusts that it does business with be considered connected to it for purposes of prohibiting investments for its RPP?

Position: Question of fact.

Reasons: Assuming the unit trusts do not hold shares of the employer, the determination of whether the employer and the unit trusts deal at arm's length would require a review of all of the facts.

XXXXXXXXXX 1999-001450
M. P. Sarazin
Attention: XXXXXXXXXX

February 8, 2000

Dear Sirs:

Re: Prohibited Investments under Paragraph 8514(1)(b)of the Regulations

This is in response to your facsimile of December 14, 1999, wherein you requested a technical interpretation as to whether an employer that provides services to a number of unit trusts in the course of its business would be considered connected to such unit trusts for the purposes of paragraph 8514(1)(b) of the Income Tax Regulations (the "Regulations").

An employer carries on business as an investment counsel and money manager and it provides investment advice and management services to a number of unit trusts (the "Trusts"), the units of which are held exclusively by registered pension plans ("RPPs"). The employer is not the trustee of any of the Trusts and all of its dealings with the Trusts are on ordinary commercial terms. If the employer establishes a money purchase RPP for its employees (the "Employer's Plan"), you ask whether we would consider the Trusts to be connected as contemplated by paragraph 8500(3)(b) of the Regulations to the employer so that Trust units would be prohibited investments for the Employer Plan under paragraph 8514(1)(b) of the Regulations. You ask if our opinion would differ if the employer were also the trustee of the Trusts.

Comments

It appears that the interpretation you seek relates to a proposed transaction and, therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996, issued by Revenue Canada. Confirmation of tax consequences with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. Nevertheless, we can provide you with the following comments.

Paragraph 8514(1)(b) of the Regulations describes an investment that an RPP is prohibited from acquiring, namely, a share of, an interest in or a debt of a person connected with a participating employer. Pursuant to paragraph 8500(3)(b) of the Regulations, a person is considered connected with an employer when the person does not deal at arm's length with the employer.

Subsection 251(1) of the Act sets out when persons are considered not to deal with each other at arm's length. Where persons are not related, it is a question of fact whether an arm's length relationship exists at a particular time. The Canada Customs and Revenue Agency's general views regarding the meaning of arm's length are found in Interpretation Bulletin IT-419R. You will note that paragraphs 15 to 19 of IT-419R deal with the determination of whether unrelated persons deal at arm's length for purposes of the Act. The determination of whether the relationship between a particular Trust and the employer as investment counsel and money manager or the employer as trustee will be found to be non-arm's length can only be determined after a review of all of the facts.

Note that for purposes of this discussion we have assumed that paragraphs 8500(3)(a) and (c) of the Regulations do not apply and you have advised that none of the exceptions to the prohibited investments in subsection 8514(2) of the Regulations apply.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch