21 December 2000 Internal T.I. 2000-0052357 - RRSP CONSULTATION SESSION

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 an RESP loan property to the subscriber?

2) Can "debit interest" be charged to an RRSP?

3) Are the stock exchanges listed in the Department of Finance's news release dated July 22, 1998 now law?

4) Are "designated limited partnerships" considered foreign property for purposes of subsection 206(2) of the Act?

5) Is the writing of an option a qualified investment for purposes of an RRSP trust?

6) Will a foreign share become non-qualified if it is delisted from a prescribed stock exchange.

7) What happened to the proposal to include foreign currency in the list of qualified investments for an RRSP trust when the election was called.

Position:

1) No.

2) Possibly, but there may be adverse tax consequences resulting from the overdraft.

3) Not yet..

4) No.

5) The rules regarding qualified investments are not relevant to writing options.

6) Generally, yes.

7) The proposal was not introduced as a bill prior to the election call.

Reasons:

1) The RESP will be immediately revoked.

2) Subsection 146(4) or 146(10) will apply if the RRSP trust borrows money or any property of the RRSP trust is used as security for a loan.

3) The regulation was pre-published in Part I of the Canada Gazette on December 9, 2000..

4) Paragraph 5000(1.1)(e) was passed on May 18, 2000.

5) No property is acquired, so whether or not the property is a qualified investment is not relevant to writing options.

6) Unless it is qualified by some other provision, if it is no longer listed on a prescribed stock exchange, it is no longer a qualified investment for an RRSP trust.

7) The Department of Finance had invited the public to comment on the legislation.

			December 21, 2000

	CLIENT SERVICES DIRECTORATE	HEADQUARTERS
	Specialty Publications Section	Income Tax Rulings
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			2000-005235

RRSP Consultation Session November 6, 2000 - Questions and Answers

Below are our views on the questions posed to us at the consultation session:

Question 1

Will there be adverse tax consequences if property in an RESP is used to provide a loan in a year to the subscriber, and the loan is repaid before the end of the year?

Answer 1

If an RESP trust invests in a non-qualified investment (for example, a promissory note from the subscriber) after October 27, 1998, the RESP will immediately be revocable by virtue of paragraph 146.1(2.1)(a) of the Income Tax Act (the "Act"). Investments that are qualified for purposes of an RESP trust are set out in the definition of "qualified investment" in subsection 146.1(1) of the Act, and in proposed section 4900 of the Income Tax Regulations (the "Regulations").

Question 2

From time to time, an RRSP issuer will charge an RRSP account "debit interest" where there is a delay in making a contribution to an RRSP. Can "debit interest" be paid from an RRSP?

Answer 2

We are not entirely clear on the sequence of transactions in the above scenario, but we assume that an investment is purchased on behalf of an RRSP trust prior to receipt by the RRSP trust of the funds from the annuitant. Hence, the RRSP trust would be in a "debit balance", or overdraft, which would give rise to an interest charge.

Without any facts, it is difficult for us to provide any conclusive comments, however, it is likely that reasonable interest charges would be a charge of the RRSP trust. It should be noted that, depending on the arrangements, the overdraft may constitute the borrowing of money or the use of the plan property as security for a loan such that subsection 146(4) or 146(10) of the Act will apply. Where the RRSP trust has borrowed money, subsection 146(4) subjects the income of the trust to tax under Part I of the Act. If any property of the RRSP trust is used as security for a loan, subsection 146(10) will add to the income of the annuitant the fair market value of the property so used.

Question 3

Is the Oslo Stock Exchange a prescribed stock exchange under section 3201 of the Regulations?

Answer 3

The Department of Finance issued a news release on July 22, 1998 proposing to add the following stock exchanges to the list of prescribed stock exchanges in section 3201 of the Regulations, with effect generally from July 22, 1998:

• the Copenhagen Stock Exchange
• the Helsinki Stock Exchange
• the Johannesburg Stock Exchange
• the Oslo Stock Exchange
• the Stockholm Stock Exchange
• the Tel Aviv Stock Exchange, and
• the Vienna Stock Exchange

The Regulation was published in Part I of the Canada Gazette on December 9, 2000.

Question 4

Is an interest in a "designated limited partnership" foreign property for purposes of the tax on excess foreign property in subsection 206(2) of the Act?

Answer 4

No. Paragraph 5000(1.1)(e)of the Regulations was added by P.C. 2000-275, subsec.1(1), May 18, 2000 to exclude an interest in a designated limited partnership from the definition of "foreign property" in subsection 206(1) of the Act, applicable to months that end after 1997.

Question 5

Please comment on the last paragraph in document E9823845, where you say that "the writing of covered call options is not subject to the rules governing qualified investments". Are you saying that writing covered call options is a qualified investment, or that it is not a qualified investment?

Answer 5

Neither. An RRSP trust that sells (writes) a put or call option is not acquiring a property (other than the cash received in the sale). Therefore the question of whether or not the option is a qualified investment for purposes of the tax on excess foreign property in section 206 of the Act is not relevant, since no property is acquired under this transaction.

Question 6

If a share of a foreign corporation is a qualified investment for an RRSP trust because it is listed on a stock exchange prescribed by section 3201 of the Regulations, will the share become non-qualified if the share is delisted?

Answer 6

Yes. Assuming the share does not remain a qualified investment by virtue of another provision of the Act or the Regulations, where the share is no longer listed on a stock exchange prescribed by section 3201 of the Regulations, it will no longer be a qualified investment for purposes of section 146 of the Act. The rules applicable to shares that become non-qualified while held in the plan are set out in section 207.1 of the Act. In effect, the trust must pay a tax of 1% of the fair market value of the property at the time it was acquired on any non-qualified investment held by the trust at the end of each month. In addition, the RRSP trust is taxable under Part I of the Act on the income and gains of the non-qualified investment by virtue of subsection 146(10.1) of the Act.

Question 7

The proposed foreign bank branches legislation released on August 8, 2000 contains a provision to include foreign currency in the list of qualified investments for deferred income plans generally effective after June 27, 1999. Did that proposed legislation die when the federal election was called?

Answer 7

At the time Parliament was dissolved on October 22, 2000, the proposed foreign bank branches legislation had not yet been tabled in Parliament. In its news release (2000-059) announcing the proposed legislation, the Department of Finance invited taxpayers and their professional advisors to review and comment on the proposals before they are submitted to Parliament as a bill.

We trust that our comments have been helpful.

Roberta Albert
Deferred Income Plans Section
Financial Industries Division
Income Tax Rulings Directorate