22 February 2001 External T.I. 2000-0063105 - RRSP - Qualified 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:

1. For the purposes of Regulation 4900(12) is there an acquisition of shares when 86(1) applies to an exchange of shares?

2. For the purposes of Regulation 4900(12) is there an acquisition of shares when 51(1) applies to an exchange of shares?

3. Where an RRSP holds shares of a corporation as a qualified investment , will the acquisition of additional shares by an RRSP or an annuitant of an RRSP cause the shares already held to become non qualified?

Position:

1. Yes.

2. Yes.

3. Not in normal circumstances.

Reasons:

There is an acquisition of shares under both 86(1) and 51(1) of the Act at the time of the exchange. However there may be a carryover of the cost amount of the shares for purposes of the provision.

XXXXXXXXXX  		2000-006310
W. C. Harding
February 22, 2001

Dear XXXXXXXXXX:

Re: RRSP Qualified Investments

This is in reply to your letter of December 19, 2000, in which you asked if shares of a corporation that were qualified investments for an RRSP pursuant to subsection 4900(12) of the Income Tax Regulations (the "Regulations) would continue to be qualified investments if:

• additional shares were acquired by the RRSP;
• additional shares were acquired by the annuitant of the RRSP;
• an exchange of shares occurred as a part of a reorganization of capital to which section 86 of the Income Tax Act (the "Act") applied; or
• a share for share exchange of shares occurred to which section 51 of the Act applied.

Although you have asked for our technical interpretation on a hypothetical situation, it appears that your request may involve a transaction or series of transactions contemplated by a specific taxpayer. The Canada Customs and Revenue Agency (the "CCRA") does not provide written comments on specific proposed transactions other than in reply to advance ruling requests submitted in the manner set out in Information Circular 70-6R4 Advance Income Tax Rulings, available on the internet at http://www.ccra-adrc.gc.ca/E/pub/tp/ic70-6r4em/. However, we are able to offer the following general comments on the relevant provision of the Act, which may apply. Please note that these comments are general in nature, and may or may not apply in a specific situation. As such, they are not binding on the CCRA.

Amendments to subsection 4900(12) of the Regulations have been proposed which are applicable to property acquired after October 27, 1998. In general terms, subsection 4900(12) of the Regulations, as proposed to be amended, provides that a share of a corporation will be a qualified investment for a trust governed by an RRSP if, at the time the share is acquired, it is a share described in paragraph (a), (b) or (c) of the subsection and immediately after the time the share was acquired, any person who is an annuitant, beneficiary or a subscriber under the plan (herein after referred to as the annuitant) was not a "connected shareholder" of the corporation, as that term is defined in subsection 4901(2) of the Regulations.

The conditions respecting the status of the corporation in paragraph 4900(12)(a) of the Regulations must be satisfied only at the time a share of a corporation is acquired by the Plan or at the end of the taxation year of the corporation ending before the time a share is acquired. Similarly, the conditions respecting the "connected shareholder" must be satisfied only once, at the time immediately after a share is acquired by the Plan. If the corporation should fail to remain a qualified corporation or the annuitant should become a "connected shareholder" at a later time, the shares held in the trust will not consequently become non-qualified investments for the Plan. Accordingly, we can advise that the acquisition of additional shares of a small business corporation by an RRSP or by the annuitant of the RRSP will not result in the disqualification of any shares previously acquired and held by the trust.

The CCRA takes the view that there will be an acquisition of shares by a trust governed by an RRSP where existing shares held by the trust are exchanged for the new shares of the corporation in the course of a reorganization described in either subsection 51(1) or 86(1) of the Act. Accordingly, the conditions in subsection 4900(12) of the Regulations will have to be met at the time of the acquisition. However, we also note that a rollover of the cost amount of the existing shares may allow the annuitant to still satisfy the connected shareholder tests discussed above.

We trust this explanation will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch