19 July 2002 External T.I. 2002-0146675 - FINAL DRAFT OF IT-320R3

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. Would we consider revising draft IT-320R3 to allow a registered plan to purchase a put option as a qualified investment?

2. Would we consider revising draft IT-320R3 to allow a registered plan to write a call option as long as it is "covered" by either actual ownership of the underlying security or possession of a call option thereon?

Position:

1. No.

2. No.

Reasons:

1. It would require a change in legislation, thus it is a tax policy matter.

2. Our position on writing covered call options applies only where the plan has actual ownership of the underlying property.

XXXXXXXXXX 2002-014667
P. Kohnen
July 19, 2002

Dear XXXXXXXXXX:

Re: Final Draft of Interpretation Bulletin IT-320R3 - Qualified Investments

This is in reply to your letter of June 10, 2002 wherein you provided two suggested revisions to the above-referenced draft interpretation bulletin (the "IT").

Our Comments:

The first suggestion in your letter dealt with paragraph 22 of the IT, which discusses call and put options. You suggest that the IT be revised to allow a trust governed by a registered retirement savings plan, a registered education savings plan or a registered retirement income fund (hereinafter collectively referred to as "Deferred Plans") to purchase put options.

A plan that purchases a put option acquires a right to sell securities at an agreed-upon price. This right to dispose of property is not a qualified investment, as defined in the Income Tax Act (the "Act) or the Income Tax Regulations.

It is the responsibility of the Canada Customs and Revenue Agency ("CCRA") to interpret and administer the law as enacted by Parliament. It is the role of the Department of Finance, which is responsible for the implementation of tax policy, to consider changes to existing tax legislation. Accordingly, should you wish to petition that a put option should be a qualified investment for a registered plan, you may wish to contact the Tax Policy Branch of the Department of Finance, L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario, K1A 0G5.

The second suggestion in your letter was that paragraph 23 of the IT be changed to allow a Deferred Plan trust to write a call option as long as it is at all times covered either by direct ownership by the trust of the underlying property on which the option is written, or by the concurrent holding by the trust of a call option on the underlying property.

Under the Act, Deferred Plans are not allowed to carry on a business. Paragraph 23 of the IT discusses how the Act applies to each of the Deferred Plans when they are carrying on a business. The determination of whether a Deferred Plan is carrying on a business is always a question of fact. However, it has always been our position that the writing of a naked call option by a plan trust may constitute the carrying on a business by the trust, for the purpose of applying the provisions of subsections 146(4) or 146.3(3) and paragraph 146.1(2.1)(c) of the Act, as applicable.

We consider a plan to have written a naked call option when it writes an option on an underlying security that the plan does not have. Black's Law Dictionary, 6th Edition, defines naked options as "options sold by investors ... even though they own no stock to back up those commitments". We would not consider the holding by the plan of a call option on the underlying security to constitute ownership by the plan of the underlying security. Accordingly, we are unable to revise our position in paragraph 23 of the IT.

The above comments are an expression of opinion and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R5.

Thank you for bringing your concerns to the attention of the CCRA.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate