1 November 2000 External T.I. 2000-0044495 - RRSP SHARES OF A CCPC

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 CCPC be a qualified investment for an RRSP?

Position: Discussed 4900(6)(a) and 4900(12)(a).

Reasons: We cannot comment on the qualification of a specific corporation except in the context of an advance income tax ruling where an interpretation of law is required vis-a-vis the specific facts of the case.

XXXXXXXXXX 2000-004449
M. P. Sarazin
Attention: XXXXXXXXXX

November 1, 2000

Dear Sirs:

Re: Small Business Corporation Shares as Qualified Investment for RRSPs

This is in reply to your letter of August 3, 2000, forwarded to us by the Registered Plans Division, requesting confirmation that shares of your company would be qualified investments for a registered retirement savings plan trust (hereinafter referred to as the "Plan"). Your completed formT3F has been retained by the Registered Plans Division for their further action but please note our comments at the end of this letter on this matter.

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 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.

The following is an overview of the rules respecting Plan 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 and Regulations. Generally, a Plan 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 Income Tax Act (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 a Plan as noted above, they may qualify under paragraph 4900(6)(a) of the Income Tax Regulations ("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. Frequently, a corporation may 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 Plan if the annuitant under the Plan 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 a Plan after November 29, 1994, a "designated shareholder" of a corporation is any Plan annuitant who at the time

(a) is, or is related to, one or more "specified shareholders" (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 satisfies two conditions: First, the annuitant or related person must deal at arm's length with the corporation or the related corporation. For a discussion of the criteria used to determine whether persons deal at arm's length, refer to the current version of IT-419, Meaning of Arm's Length. Note that a person who owns more than 50% of a corporation's shares controls the corporation and therefore does not deal at arm's length with the corporation. Second, the aggregate of the cost amounts to the annuitant and related person(s) of all the shares of the corporation or related corporation total less than $25,000.

For purposes of the 10%, 50% and $25,000 tests paragraph note that (b) of the definition of "specified shareholder" in subsection 248(1) of the Act deems an annuitant of a Plan to own the shares owned by the Plan. In addition, any share that the Plan annuitant or a non-arm's-length person has a right to acquire is included for purposes of the 10%, 50% 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 Plan 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 Plan under paragraph 4900(6)(a) of the Regulations.

Furthermore in accordance with subsection 4900(8) of the Regulations, a share of an "eligible corporation" will become non-qualified 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 Plan if immediately after the time the shares were acquired by the Plan the annuitant under the Plan 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 a Plan. Shares of a newly-formed corporation generally will not qualify prior to the start of an active business.

With respect to property acquired by a Plan 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 or related person satisfies two conditions: First, the annuitant or related person must deal at arm's length with the corporation or the related corporation. For a discussion of the criteria used to determine whether persons deal at arm's length, refer to the current version of IT-419, Meaning of Arm's Length. Note that a person who owns more than 50% of a corporation's shares controls the corporation and therefore does not deal at arm's length with the corporation. Second, the aggregate of the cost amounts to the annuitant and related person(s) of all the shares of the corporation or related corporation must total less than $25,000.

For the purposes of the 10%, 50% and $25,000 tests, an annuitant of a Plan is deemed to own the shares owned by both non-arm's-length persons and the Plan (see the definition of "specified shareholder" in paragraphs 248(l)(a) and (b) of the Act). In addition, any share that the Plan annuitant or a non-arm's-length person has a right to acquire is included for purposes of the 10%, 50% 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 Plan 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 Plan. 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 Plan.

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 Plan 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.

Form T3F is only required to be filed by a corporation or trust that is one of those listed in Schedule I or II and is not a registered investment. The form is not required to be filed by any corporation or trust whose shares or units will be acquired by a Plan. You have filled out Part I of Schedule II to indicate that your company is a quasi-investment corporation described in paragraph 4900(1)(i) of the Regulations. However, there is no need to complete Part I unless the investment you consider to be a "qualified investment" is one described in paragraph 4900(1)(k) of the Regulations. Since you have not referred to paragraph 4900(1)(k) in your letter, but rather to your potential status under subsection 4900(6) of the Regulations we believe you have completed this form in error. Should you wish to pursue this matter further, please contact the Registered Plan Division of the Canada Customs and Revenue Agency in order to have your T3F rescinded.

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

c.c. Don McGuire
Registered Plans Division
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