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:
Are EBC shares acquired under SBVCA of BC qualified investments.
Position: General comments provided.
Reasons:
They will likely be eligible as small business corporations if the tests in 4900(12)(a) are satisfied. The treatment of the related tax credits could cause some unexpected tax consequences.
XXXXXXXXXX 2003-002443
W. C. Harding
December 3, 2003
Dear XXXXXXXXXX:
Re: Prescribed Venture Capital Corporations and the
Small Business Venture Capital Act (British Columbia) (the "SBVCA")
This is in reply to your correspondence of June 12, 2003, in which you requested a ruling that shares of XXXXXXXXXX (the "Corporation") would be qualified investments for trusts governed by registered retirement savings plans (RRSPs), registered education savings plans (RESPs) and registered retirement income funds (RRIFs) (collectively, "Registered Plans").
As discussed during our telephone conversation of November 6, 2003 (XXXXXXXXXX/Harding), this Directorate may only provide written confirmation of the tax implications inherent in particular situations when the transactions involved are the subject matter of an advance income tax ruling request submitted in the manner set out in the Canada Customs and Revenue Agency ("CCRA") Information Circular 70-6R5 dated May 17, 2002 (as updated June 27, 2003). Accordingly, we are unable to provide you with the ruling you have requested. However, we can provide the following information, which, while not binding on CCRA, may be of assistance to you.
CCRA's Interpretation Bulletin IT-320R3 Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds, provides detailed information on a number of provisions by which shares of corporations are qualified investments for Registered Plans. In this respect, paragraph 9 of the bulletin indicates that shares of certain venture capital corporations that are prescribed venture capital corporations may be qualified investments of a Registered Plan in accordance with paragraph 4900(12)(b) of the Income Tax Regulations (the "Regulations"). Amongst others, this provision provides that shares of venture capital corporations registered under the Small Business Venture Capital Act, Statutes of British Columbia 1985, c. 56 (the "SBVCA") may be qualified investments.
We note that in accordance with the documentation you provided, the Corporation has been registered as an Eligible Business Corporation (an "EBC") under section 28.2 of the SBVCA effective October 24, 2003. However, based on our discussions and the information provided, it does not appear that the corporation is a venture capital corporation. Accordingly, it appears that the shares of the Corporation would not be qualified investments in accordance with paragraph 4900(12)(b) of the Regulations. Nevertheless, it is our understanding that the Corporation is a "Canadian controlled private corporation" as that term is defined in the Income Tax Act (the "Act"). Accordingly, a share of the Corporation may still be a qualified investment under either paragraph 4900(6)(a) or 4900(12)(a) of the Regulations. To confirm this is the case, an investor would need to determine whether the Corporation satisfies the conditions of either of these paragraphs. The conditions that must be satisfied are explained in paragraph 8 of IT320R3 in respect to paragraph 4900(6)(a) of the Regulations, and in paragraphs 6 and 7 of the bulletin in respect to paragraph 4900(12)(a) of the Regulations. Please note that subsection 4900(6) of the Regulations has limited application and will generally only apply in a very limited number of situations where subsection 4900(12) of the Regulations will not otherwise apply. Accordingly, it will not be discussed further in this reply.
As noted in the bulletin, a share of a "small business corporation" that operates an "active business" at the time a Registered Plan acquires the share, will generally be a qualified investment under paragraph 4900(12)(a) of the Regulations. In respect to the Corporation, it will be a question of fact whether the Corporation will satisfy these conditions at any particular time. However, based on the material you have provided, it would appear to us that the Corporation presently satisfies both conditions. Accordingly, we would expect a share of the Corporation could be a qualified investment for a Registered Plan at the time it is acquired provided:
? the above-noted conditions continue to be satisfied at the time the Registered Plan acquires the share;
? the annuitant, subscriber and any beneficiaries of the Registered Plan are not "connected shareholders" as that term is defined in the Regulations, as discussed in paragraph 6 of the bulletin; and
? the conditions of subsection 4900(13) as described in paragraph 6 of the bulletin are satisfied.
Please note that in applying the above tests, we have found that funds received by a corporation from the issue of shares to Registered Plans are frequently invested until such time as the funds are required in the corporation's active business operations. For example, excess funds may have been invested in term deposits that are not immediately used in, or connected to, the corporation's active business operations. If this occurs and the amount of funds raised is significant, a corporation may not then be using all or substantially all of the corporation's assets in the corporation's active business. Accordingly, an otherwise qualified share of the corporation might cease to be a qualified investment for a Registered Plan until the situation is rectified.
Part 2 of the SBVCA allows "eligible investors" to receive tax credits in respect of their investments in shares of EBCs. An "Eligible Investor" is defined in the SBVCA, as a corporation to which section 2(2) of the Income Tax Act of British Columbia applies or an individual to whom section 2(1) of the Income Tax Act of British Columbia applies. Subsection 6(6.1) of the SBVCA also provides that, for the purposes of the SBVCA, shares of a corporation that are purchased, held or disposed of by an RRSP or a RRIF are deemed to be purchased, held or disposed of by the annuitant of the RRSP or RRIF. It is our understanding that the intention and the administration of this provision is to enable annuitants of an RRSP or a RRIF to qualify as Eligible Investors so they may obtain a tax credit that is available in respect of the acquisition of shares by their RRSP or RRIF. In this respect it should be noted that the annuitant's of spousal RRSPs would be the recipients of the tax credits rather than the contributing spouse and that the credit may not be available with respect to the acquisition of shares by an RESP.
The SBVCA and its related regulations also specifically provide that an Eligible Investor will not normally be required to repay any credits received under the SBVCA on the acquisition of the shares of an EBC if the shares are subsequently transferred from an individual investor to a trust governed by an RRSP or a RRIF under which the investor or the investor's spouse is the annuitant. However, such a transfer of the EBC shares is a disposition that could result in a taxable capital gain that must be reported by the individual for the year in which the transfer occurs. On the other hand, a allowable capital loss would not normally occur because paragraph 40(2)(g) of the Act provides that a loss from a disposition of property to a trust governed by an RRSP or to a RRIF under which the individual is a beneficiary, is deemed to be nil. Furthermore, because the annuitant of an RRSP or RRIF and the trust governed by such plans are not considered to be dealing with each other at arm's length, it will be necessary to ensure the proceeds of the sale by the annuitant and the purchase cost to the trust are equal to the fair market value of the shares being transferred. Otherwise, unintended tax consequences may arise.
The fair market value of a share is a question of fact, which can only be determined based on all of the factors present at the time of the transfer of the shares. A well accepted definition of fair market value is "the amount at which property would change hands between a willing buyer and a willing seller, neither being under a compulsion to buy or sell and both having reasonable knowledge of the relevant facts" (Blacks Law Dictionary, 6th edition). Generally, it is the responsibility of the parties to a non-arm's length transaction, to determine the fair market value of property that is being transferred. However, with respect to shares that entitle the holder to a tax credit, CCRA will not generally question a determination of the fair market value as being equal to the original cost of the shares to the annuitant where the shares are transferred to an RRSP or an RRIF within 30 days of the date of their original acquisition.
As a final observation, we would like to note that a tax credit provided under the SBVCA in respect to the acquisition of EBC shares is not "prescribed assistance" as that term is described in sections 7300 and 6702 of the Regulations. As a consequence, there could be unintended consequences where an individual acquires shares and then transfers them to an RRSP or a RRIF. Furthermore, these consequences would not occur if the shares of an EBC were acquired directly by the RRSP or the RRIF. In basic terms, where a taxpayer receives a tax credit under the SBVCA in respect of the acquisition by the taxpayer of the shares of an EBC, the taxpayer, must reduce the adjusted cost base of the shares by the amount of the assistance the taxpayer has received or is entitled to receive, if the investor still owns the shares at that time. Accordingly, if the shares are then transferred to an RRSP or RRIF, as discussed above, the individual may have to report a capital gain from the transfer. However, if the investor does not own the shares at that time, the amount of the credit received must be added to the investor's income for the year in accordance with paragraph 12(1)(x) of the Act.
Under section 28.94 of the SBVCA, an EBC must apply to the administrator of the SBVCA for tax credit certificates in respect of any equity capital investments received from Eligible Investors. Under section 28.95 of the SBVCA, the administrator must then verify the validity of the tax credit in accordance with the procedures set out in that provision. Once the administrator has approved the credits, it would appear to us that the investor would be entitled to receive the tax credit. CCRA, in general, considers tax credits to be received at the earliest of when the credit is applied to reduce an investor's tax instalments, to create or increase a tax refund or to reduce a tax liability. Further information in this respect may be found in Interpretation Bulletin IT-273R2 Government Assistance - General Comments and in Technical News No. 29.
Please note that all CCRA publications referred to in this letter may be obtained on the internet at http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.
We trust these comments will be of assistance.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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