26 June 2000 External T.I. 2000-0030415 - CCPC, worthless, RRSP, RRIF

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: Can an RRSP or RRIF write-off an investment in a Canadian-controlled private corporation because the annuitant claims the shares are worthless?

Position: No.

Reasons: The trustee of the RRSP or RRIF must determine what the fair market value of the shares are and the plan has to retain the shares until the shares are cancelled, sold or withdrawn from the plan or the corporation is wound-up.

XXXXXXXXXX 2000-003041
M. P. Sarazin
Attention: XXXXXXXXXX

June 26, 2000

Dear Sirs:

Re: Write-Off of Canadian-Controlled Private
Corporation Shares Held in a Registered Plan

This is in response to your letter of April 3, 2000, concerning the valuation of Canadian-controlled private company ("CCPC") shares held by a registered retirement savings plan ("RRSP") or registered retirement income fund ("RRIF") (collectively referred to as "Deferred Plan").

You have experienced situations where an annuitant under the Deferred Plan asks to withdraw the CCPC shares from the particular plan because they are worthless. You ask whether the trustee of the Deferred Plan is required to take any steps to confirm whether the CCPC shares are, in fact, worthless.

Comments

The Canada Customs and Revenue Agency (the "Agency") cannot provide rulings or approval with respect to the write-off of investments held in a Deferred Plan. How such properties are treated is dependent on the facts pertaining to the investment and the terms of the trust agreement that governs the Deferred Plan. However, we can provide the following general comments which may be of assistance to you.

Information Circular 89-3, Policy Statement on Business Equity Valuations, provides the Agency's general views regarding the valuation of shares of closely-held or private corporations. You would have to consider all of the factors related to the particular CCPC in making any determination of the fair market value of the shares of the CCPC. It could very well be that the shares of a CCPC have no value but this conclusion would have to be supported by all of the relevant facts. The Agency does not provide valuation services or give rulings on the value of properties; however, the trustee of the Deferred
Plan can contact the Valuations Section at its tax services office to discuss the valuation procedures if it has concerns.

In our view a share of a corporation continues to exist until the corporation is legally wound up or until the share is cancelled by the corporation. Until that time, a share of a corporation cannot be removed from the records of a Deferred Plan. However, the share of the CCPC may be removed from the Deferred Plan as a withdrawal from the Deferred Plan or by sale to another party. Where shares of a CCPC are simply withdrawn from a Deferred Plan by the annuitant, an amount equal to the fair market value of the property at that time must be included in the annuitant's income. Where the property is sold to a person dealing with the Deferred Plan at arm's length, the property is simply removed from the Deferred Plan records and the agreed-upon proceeds added to the Deferred Plan. However, where the property is sold to the annuitant of the Deferred Plan or to another person who is not dealing with the Deferred Plan or annuitant at arm's length, it should be ensured that the proceeds of the disposal are equal to the fair market value of the property at the time of the disposal or certain unintended consequences may arise. For example, if a property is sold for less than the fair market value of the property, the difference must be added to the annuitant's income for the year in which the sale is made. On the other hand, if the property is sold for more than it is worth, the excess will be considered to be a gift or a contribution to the Deferred Plan and could be subject to tax under Part X.1of the Income Tax Act (the "Act") in the case of an RRSP or could cause the plan's deregistration in the case of a RRIF (because paragraph 146.3(2)(f) of the Act is not satisfied and subsection 146.3(11) of the Act applies).

In the case of a RRIF, the carrier of a RRIF has the responsibility of determining the fair market value of the property in the RRIF at the beginning of each year. If the shares of a CCPC are the only property held by a RRIF and the shares have no value, there is no need to make a minimum payment out of the RRIF each year as the minimum payment would be nil. T4RIFs would have to report a nil benefit in this case.

We hope these comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate