13 February 2001 External T.I. 2001-0065945 - LEAPS calls and puts, qualified investments

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 LEAPS calls and puts be qualified investments for an RRSP?

Position: Probably not.

Reasons:

In most cases they do not provide the investor with the right to acquire property so the investment would not qualify under 4900(1)(e) of the Regulations.

XXXXXXXXXX 		2001-006594
M. P. Sarazin, CA
February 13, 2001

Dear XXXXXXXXXX:

Re: LEAPS and Qualified Investments

This is in reply to your electronic mail of January 17, 2001, requesting a technical interpretation regarding LEAPS (long term equity-anticipation units) qualifying as a qualified investment for a registered retirement savings plan ("RRSP") within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act").

You have been asked whether LEAPS Puts, Equity LEAPS Calls, Index LEAPS Call Options, Index LEAPS Put Options and Bull LEAPS Call Spreads would be qualified investments for purposes of subsection 146(1) of the Act. You provided us with a simple example of each of the types of LEAPS which was copied from the Chicago Board Options Exchange internet site.

Comments

The determination of whether a particular investment would be a qualified investment is a question of fact. Since the simple example of each of the types of LEAPS did not provide a lot of information, we are only able to provide the following general comments.

As stated in paragraph 14 of IT-320R2, a call option giving the holder the right to acquire a qualified investment will be a qualified investment. This results from the application of paragraph 4900(1)(e) of the Income Tax Regulations (the "Regulations"). Paragraph 14 of IT-320R2 also states that an RRSP that acquires a put option has acquired a non-qualified investment. This is based on the understanding that the put option involves the right to dispose of the underlying property rather than a right to acquire property as required under paragraph 4900(1)(e) of the Regulations.

Consequently, Equity LEAPS Calls may qualify as a qualified investment if it gives the holder the right to acquire a qualified investment and LEAPS Puts would not be qualified investments because it provides the holder with the right to sell property. Index LEAPS Call Options, Index LEAPS Put Options and Bull LEAPS Call Spreads do not appear to provide the investor with any rights to acquire property. The value, if any, of the Index LEAPS Call Options, the Index LEAPS Put Options and the Bull LEAPS Call Spreads appear to be based on stock market performance over the term of the particular investment. If this is in fact the case, Index LEAPS Call Options, Index LEAPS Put Options and Bull LEAPS Call Spreads will not be qualified investments.

Subsection 146(4) of the Act generally exempts an RRSP trust from paying tax under Part I of the Act. However, an RRSP trust's income from the carrying on of a business is subject to tax under Part I of the Act. Whether an RRSP that invests in LEAPS will be considered to be carrying on a business is a question of fact which can only be determined after an examination of all the relevant facts. We may conclude that an RRSP trust which invests in LEAPS is carrying on a business.

Although the foregoing comments are an expression of opinion only and are not binding on the Department, we trust they explain our position satisfactorily.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate