22 February 2002 External T.I. 2002-0117895 - 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 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 property held by an RRSP or RRIF that ceases to be a qualified investment for the plan be subjected to the various provisions of the Act that deal with the particular plan holding an investment that does not qualify as a qualified investment?

2. Will an RRSP or RRIF which holds shares of a US corporation which qualifies as a qualified investment pursuant to paragraph 4900(1)(s) of the Regulations be subject to the Part XI penalty tax?

Position:

1. Yes.

2. Yes until December 31, 2001.

Reasons:

1. The relevant provisions of the Act do not contain an exception for a property that ceases to be a qualified investment.

2. After December 31, 2001, the US corporation shares will no longer be a qualified investment and its cost is excluded from the total cost of foreign property under subparagraph 206(2)(a)(ii) of the Act for purposes of determining if the RRSP holds excessive foreign property.

						2002-011789
XXXXXXXXXX 					Karen Power, CA
(613) 957-8953
February 22, 2002

Dear XXXXXXXXXX:

Re: Eligibility of Over-the-Counter Shares as Qualified Investments

This is in reply to your facsimile of January 10, 2002, requesting confirmation that qualified investments under paragraph 4900(1)(s) of the Income Tax Regulations (the "Regulations") held by a registered retirement savings plan ("RRSP") and registered retirement income fund ("RRIF") (hereinafter collectively referred to as the "Plans") that cease to be qualified investments as of January 1, 2002 will result in the application of certain provisions of the Income Tax Act (the "Act").

Our Comments

Paragraph 4900(1)(s) of the Regulations provides transitional relief in respect of certain non-qualified investments. This 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.

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 Plans continue to hold property, to which paragraph 4900(1)(s) of the Regulations applied, the Plans will be subject to tax under section 207.1 of the Act (Part XI.1). Subsections 207.1(1) and (4) of the Act, which apply to RRSPs and RRIFs, respectively, impose a tax at the end of each month on the Plans 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 Plans of all such property that the Plans continue to hold that constitutes a non-qualified investment.

In addition, 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. The tax is payable upon a notional taxable income calculated by reference to the income or loss from the non-qualified investments, and capital gains and capital losses derived from dispositions of such investments. For this purpose, income includes, interest, dividends, capital dividends and the full amount of capital gains in excess of capital losses, unreduced by the fractions set out in paragraphs 38(a) and (b) of the Act.

Under Part XI of the Act, a Plan is generally subjected to a special tax when the cost amount of its foreign property exceeds 30% (formerly 20%) of the cost amount of all property held by the Plan. A share of a U.S. corporation is a "foreign property" within the meaning assigned by subsection 206(1) of the Act. Consequently, the cost of a share of a U.S. corporation held by a Plan will be included in the cost amount of the foreign property held by the Plan for the purposes of determining whether the Plan will be subjected to taxes under Part XI of the Act.

Where a Plan holds a share of a U.S. corporation that qualifies as a qualified investment under paragraph 4900(1)(s) of the Regulations and the Plan continues to hold the share subsequent to December 31, 2001, the Plan will be subjected to taxes under Part XI.1 of the Act. The taxes under Part XI.1 are based on the cost amount of the non-qualified investment held by the Plan. Where a Plan holds a foreign property that is already subjected to taxes under Part XI.1 of the Act, the cost amount of the particular foreign property is excluded from the total cost of the foreign property held by the Plan under subparagraph 206(2)(a)(ii) of the Act. This exclusion ensures that the Plan is not subjected to penalty taxes under Parts XI and XI.1 in respect of the same property. Consequently, the Plan that holds a share of a U.S. corporation that ceases to qualify as a qualified investment subsequent to its acquisition will only be subjected to taxes under Part XI.1 in respect of the share.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch