4 December 2003 Ministerial Correspondence 2003-0043564 - REGULATION 4900(1)(s)

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:

Will property held by an RRSP that was subject to Regulation 4900(1)(s), 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?

Position: Yes

Reasons:

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

December 4, 2003

XXXXXXXXXX

Dear XXXXXXXXXX:

Mr. Alan Nymark, Commissioner of the Canada Customs and Revenue Agency (CCRA), has asked me to reply to your letter of October 6, 2003, concerning tax charged on investments held inside your registered retirement savings plan (RRSP).

The particular investments held in your RRSP were shares of a corporation which were listed on the over-the-counter bulletin board operated by NASDAQ Stock Market, Inc. which were acquired in 1999, for approximately $8,000, and which you indicated were worthless by the end of 2001.

Generally, shares listed on the over-the-counter services of the NASDAQ are not eligible investments for RRSPs pursuant to rules in the Income Tax Act and the Income Tax Regulations. However, many institutions believed that such shares were qualified investments and many individuals held such shares in their RRSPs. When the Department of Finance became aware of this problem, it provided relief and allowed such investments to be qualified investments for a period of time up to December 31, 2001, so that individuals could correct this situation by disposing of these shares from their RRSPs in an orderly manner.

However, if, after December 31, 2001, the RRSP continued to hold property to which this transitional relief applied, that is, the RRSP did not dispose of the shares, the RRSP holds a non-qualified investment and the RRSP is subject to Part XI.1 tax. The amount of tax payable for each month is equal to one per cent of the fair market value of the property at the time it was acquired by the RRSP of all such property that is a non-qualified investment.

Based on the facts in your letter, your RRSP held shares that were subject to these transitional relief provisions. However, the RRSP did not dispose of the shares before 2002 and, consequently, your RRSP is subject to Part XI.1 tax, payable each month, equal to one per cent of the fair market value of the property at the time it was acquired by the RRSP which, in your case, is approximately $8,000. Although the shares may have been worthless at the time, the tax applies to their fair market value at the time the RRSP acquired them, not their fair market value at the time the shares became non-qualified.

When the shares of the corporation are removed from your RRSP, the RRSP will no longer be subject to the Part XI.1 tax after the date the shares are removed from your RRSP. When shares of a corporation are simply withdrawn from an RRSP by the annuitant, an amount equal to the fair market value of the shares at the time of withdrawal must be reported on a T4RSP and included in the annuitant's income. For example, if the value of the shares is nil, the income inclusion in respect of the withdrawal of shares is nil.

We trust that the above comments have clarified the taxation of non-qualified investments held in your RRSP. We note that the fact sheet that you refer to in your letter as published on January 25, 2002, was originally posted on the CCRA's Website in August 2000, and that the law was passed in July 2001. The fact sheet as posted in August 2000, reflects assurances given by the investment industry on this issue at that time. Accordingly, we understood that the investment community was aware of these rules and of the transition period available to undertake transactions to avoid the circumstances in which you now find yourself. We, therefore, suggest that you contact the financial institution that manages your RRSP to discuss this matter.

Yours sincerely,

Bill McCloskey
Assistant Commissioner
Policy & Legislation Branch

Mary Pat Baldwin
823-2631
2003-004356
November 25, 2003