31 October 2000 External T.I. 2000-0043445 - LSVCC SHARES HELD IN RRIFS

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:

1. Can LSVCC shares be held in a RRIF?

2. Does the annuitant of a RRIF get the LSVCC tax credit if shares are purchased in a RRIF?

3. What happens to the LSVCC tax credit if shares are redeemed to pay minimum amount under a RRIF?

Position:

1. LSVCC shares may be held in a RRIF, but may not be issued to a RRIF by a federal LSVCC.

2. No.

3. Part XII.5 may be payable by the RRIF.

Reasons:

1. Shares of an LSVCC in section 6700 of the Regulations are qualified investments for a RRIF. Federal LSVCCs are issuable only to individuals and RRSPs under the registration requirements in subsection 204.81(1) of the Act.

2. RRIFs are not "qualifying trusts" under section 127.4 of the Act.

3. Part XII.5 tax is payable if a share is redeemed, acquired or cancelled less than 8 years after it is issued.

XXXXXXXXXX 								2000-004344
S. E. Thomson

Attention: XXXXXXXXXX

October 31, 2000

Dear XXXXXXXXXX:

Re: Shares of a Labour Sponsored Venture Capital
Corporation ("LSVCC") in Registered Retirement Income Funds ("RRIFs")

This is in reply to your letter of August 22, 2000 in which you ask several questions related to LSVCC shares held in RRIFs. Your questions appear to be hypothetical in nature; accordingly, we provide our technical interpretation of specific provisions relevant to your questions. Although a technical interpretation is not binding on the Canada Customs and Revenue Agency, you may find our comments helpful.

Investments which are qualified for a RRIF are set out in subsection 146.3 of the Income Tax Act (the "Act") and section 4900 of the Income Tax Regulations (the "Regulations"). Paragraph 4900(6)(a) of the Regulations includes shares of an "eligible corporation" within the meaning assigned by subsection 5100(1) of the Regulations. The definition of "eligible corporation" in subsection 5100(1) of the Regulations includes, in paragraph (b) thereof, a "prescribed venture capital corporation" as described in section 6700 of the Regulations. Similarly, paragraph 4900(12)(b) includes shares of a "prescribed venture capital corporation" described in section 6700 of the Regulations. Section 6700 of the Regulations includes a "registered labour-sponsored venture capital corporation" as registered under subsection 204.81(1) of the Act, and corporations registered under various provincial acts. Therefore, if it meets the requirements of the various provisions set out herein, a share of a LSVCC will be a qualified investment for a RRIF.

Section 6701 of the Regulations sets out the corporations prescribed for purposes of the labour-sponsored funds tax credit in section 127.4 of the Act. Included in section 6701 of the Regulations are "registered labour-sponsored venture capital corporations" as registered under subsection 204.81(1) of the Act (hereinafter referred to as "federal LSVCCs") and corporations registered under various provincial acts (hereinafter referred to as "provincial LSVCCs"). By virtue of paragraphs 127.4(5)(a) and 127.4(6)(a) of the Act, an individual is entitled to a labour-sponsored funds tax credit equal to 15% of the net cost to the individual (or to a qualifying trust for the individual) to a maximum of $750 for the original acquisition of the share by the individual or the trust. Note that a "qualifying trust" for the individual includes a trust governed by a registered retirement savings plan ("RRSP"), but does not include a trust governed by a RRIF. In addition, the registration rules in subsection 204.81(1) of the Act provide that Class A shares of a federal LSVCC are issuable only to individuals (other than trusts) and to trusts governed by RRSPs; therefore, a federal LSVCC share may not be issued to a RRIF. Whether a provincial LSVCC share may be issued to a RRIF should be confirmed by reference to the relevant provincial legislation. Note, however, that if a provincial LSVCC is issued to a RRIF, the individual is not entitled to the labour-sponsored funds tax credit because the RRIF is not a "qualifying trust".

The registration rules in subsection 204.81(1) of the Act provide that a federal LSVCC may not redeem, acquire or cancel a Class A share less than 8 years after the day on which the share was issued unless certain conditions are met. One of these conditions is where the disposing shareholder pays a tax as set out in Part XII.5 of the Act (essentially a repayment of the labour-sponsored funds tax credit). In addition, the registration rules provide that a federal LSVCC may not register a transfer of a share unless certain conditions are met, one of which is that the transfer is to a spouse or former spouse, or a trust governed by an RRSP or a RRIF under which the individual or his/her spouse or former spouse is the annuitant. To paraphrase, a federal LSVCC share may be transferred to a RRIF, but Part XII.5 tax applies if it is redeemed, acquired or cancelled within 8 years of its issue. Part XII.5 tax applies whether or not the redemption, acquisition or cancellation occurs in order to fund the payment of the "minimum amount" as defined in the RRIF provisions in section 146.3 of the Act.

Whether the holding period rules for provincial LSVCC shares are similar should be confirmed by reference to the relevant provincial legislation. Note, though, that a requirement to repay any portion of a provincial tax credit in respect of an LSVCC will trigger Part XII.5 tax.

Your truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate