23 November 2001 External T.I. 2001-0108225 - TREATMENT OF NASDAQ OVER THE COUNTER SHARES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

1. Will a non-qualified investment to which paragraph 4900(1)(s) of the Regulations applies, be considered to be acquired by a deferred plan on January 1, 2002 if held by the plan trust past December 31, 2001.

2. If the plan trust holds the property past December 31, 2001 will Part XI.1 tax apply?

Position:

1. No

2. Yes, Part XI.1 tax applies and the tax is based on the fair market value of the property at the time the property was acquired.

Reasons:

1. Factual acquisition must have occurred before September, 2000 for 4900(1)(s) of the Regulations to apply and the law does not deem an acquisition to occur at the later date.

2. Part XI.1 of the Act.

XXXXXXXXXX 								2001-010822
M. P. Baldwin, CA
November 23, 2001 

Dear XXXXXXXXXX:

Re: Treatment of NASDAQ Over-the-Counter Shares

This letter is further to our letter, reference 2001-007920, issued on June 18, 2001, and in reply to your facsimile of October 31, 2001 requesting clarification of the treatment of shares acquired on the NASDAQ over-the-counter bulletin board and the taxation of certain non-qualified investments of a registered retirement savings plan ("RRSP") or investments that are not qualified investments of a registered retirement income fund ("RRIF"). Hereinafter, both types of investments will be collectively referred to as "non-qualified investments".

New paragraph 4900(1)(s) of the Income Tax Regulations (the "Regulations"), provides transitional relief in respect of certain non-qualified investments. This new paragraph provides, in general, that a security of a corporation 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 was acquired by a plan trust in a transaction completed before September 2000, will be a qualified investment until December 31, 2001.

As noted in our original letter (2001-007920), where paragraph 4900(1)(s) of the Regulations applies to a property to prescribe it as a qualified investment until December 31, 2001, there is no acquisition on January 1, 2002 of a non-qualified investment. However, if, after December 31, 2001, the RRSP or RRIF trust continues to hold property, to which paragraph 4900(1)(s) of the Regulations applied, the trust will be subject to tax under subsections 207.1(1) and (4) of the Income Tax Act (the "Act"), respectively. Subsections 207.1(1) and (4) of the Act (Part XI.1) impose a tax at the end of each month on an RRSP or a RRIF trust in respect of non-qualified investments held by it. The amount of tax payable for each month is equal to 1% of the fair market value of the property at the time it was acquired by the trust of all such property which the trust continues to hold that constitutes a non-qualified investment.

Consequently, in our view, if, after December 31, 2001, an RRSP or a RRIF trust continues to hold property to which paragraph 4900(1)(s) of the Regulations applied, the tax imposed each month on the trust, pursuant to Part XI.1 of the Act, will be 1% of the fair market value of the property at the time the property was acquired.

We trust that the above comments will be of assistance to you.

Yours truly,

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