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: What are the tax consequences where a non-qualified investment which was deemed by new paragraph 4900(1)(s) of the Regulations to be a qualified investment for a transitional period, is still held by a deferred plan on and after January 1, 2002?
Position: Does not create an income inclusion for the plan annuitant of an RRSP or RRIF, nor does it invoke a tax under 198(1) for a DPSP. Will generate Part X1.1 tax for RRSP, DPSP, RESP or RRIF if held at any month-end from January 2002 onward. May render RESP revocable. For RRSP or RRIF, there may be tax payable on earnings generated by the non-qualified investment.
Reasons: Factual acquisition must have occurred before September, 2000 for Regulation 4900(1)(s) to apply and the law does not deem an acquisition to occur at the later date.
XXXXXXXXXX 2001-009044
P. Kohnen
July 9, 2001
Dear XXXXXXXXXX:
Re: Request for technical interpretation - tax treatment of Over-the-Counter Shares
This is in reply to your facsimile submission of June 27, 2001, requesting our views regarding the taxation of certain investments held by registered plans. Your question would encompass non-qualified investments of a registered retirement savings plan ("RRSP") or of a deferred profit sharing plan ("DPSP"), or investments that are not qualified investments of a registered retirement income fund ("RRIF") or of a registered educational savings plan ("RESP"). Hereinafter, all of the above investments will be collectively referred to as 'non-qualified investments' for simplicity.
New paragraph 4900(1)(s) of the Income Tax Regulations (the "Regulations"), which was published in Part II of the Canada Gazette on July 4, 2001, provides transitional relief in respect of certain non-qualified investments. This new paragraph deems securities quoted on the over-the-counter bulletin board operated by NASDAQ Stock Market, Inc. or on the over-the-counter quotation service operated by Pink Sheets, LLC, which were acquired by a deferred plan in an arm's length transaction completed before September 1, 2000, to be a qualified investment until December 31, 2001. Your question concerns the tax implications to your RRSP, DPSP, RRIF and RESP clients who continue to hold these investments beyond the transitional relief period.
Subsection 146(10) of the Income Tax Act (the "Act") is applicable where a trust governed by an RRSP acquires a non-qualified investment in the taxation year. It provides for an inclusion in the income of the plan annuitant of an amount equal to the fair market value of the non-qualified investment at the time it was acquired. Subsection 146.3(7) provides for a similar income inclusion where an investment that is not a qualified investment is acquired in the year by a RRIF. In either case, the non-qualified investment must be acquired in the year for the income inclusion to occur.
Subsection 198(1) of the Act applies where a trust governed by a DPSP acquires a non-qualified investment in the taxation year. It imposes a tax on the trust equal to the fair market value of the non-qualified investment at the time it was acquired. The tax under subsection 198(1) is payable within 10 days of the acquisition of the non-qualified investment.
For non-qualified investments to which Regulation 4900(1)(s) applies until December 31, 2001, there is no acquisition on January 1, 2002. Factual acquisition must have occurred before September 2000 for Regulation 4900(1)(s) to apply and the law does not deem an acquisition to occur at the later date. Accordingly, neither subsection 146(10) nor 146.3(7) will apply to cause an income inclusion to a plan annuitant if a non-qualified investment, which Regulation 4900(1)(s) deems to be a qualified investment up to December 31, 2001, is held in their RRSP or RRIF after that date. Furthermore, subsection 198(1) will not apply a tax to a trust governed by a DPSP, which continues to hold an investment after Regulation 4900(1)(s) has ceased to apply.
Note, however, that subsections 207.1(1), (2), (3) and (4) of the Act, which apply to RRSPs, DPSPs, RESPs and RRIFs, respectively, will impose tax equal to 1% of the fair market value at the time of aquisition of the non-qualified investment, at each month-end commencing with January 2002, that the trust continues to hold the investment.
Furthermore, subsections 146(10.1) and 146.3(9) of the Act, which apply to RRSPs and RRIFs, respectively, will result in the earnings for the year in respect of non-qualified investments held by the respective RRSP or RRIF trust in the year being subjected to tax under Part I of the Act.
An RESP that continues to hold a property to which Regulation 4900(1)(s) deems to be a qualified investment up to December 31, 2001 may become revocable. In accordance with paragraph 146.1(2.1)(b) of the Act, if property held by an RESP ceases to be a qualified investment, and is not disposed of within 60 days of becoming a non-qualified investment, the RESP becomes revocable.
We trust that the above comments are of assistance.
Yours truly,
for/Roberta Albert, C.A.
for Director
Financial Industries Division
Income Tax Rulings Directorate
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