27 February 2004 External T.I. 2003-0051671E5 - Convertible preferred shares - whether QI

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.

Principal Issues: Whether convertible preferred shares and warrants to be issued by a particular corporation would be considered "qualified investments" for a trust governed by an RRSP.

Position: General comments only.

Reasons: Whether particular investments are qualified investments is a question of fact.

XXXXXXXXXX 2003-005167
J. Gibbons, CGA
February 27, 2004

Dear XXXXXXXXXX:

Re: Convertible Preferred Shares and Warrants

This is in reply to your email dated December 3, 2003, wherein you asked us whether convertible preferred shares and warrants to be issued by a particular corporation would be considered "qualified investments" for a trust governed by a registered retirement savings plan ("RRSP"). You indicated that even after reviewing the Income Tax Act (the "Act"), the Income Tax Regulations (the "Regulations"), and Interpretation Bulletin IT-320R3, Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds, you were still unable to determine whether the particular shares and warrants would be qualified investments for an RRSP trust.

Our comments

Written confirmation of the tax implications inherent in particular transactions is provided by us only where the transactions are proposed and the subject matter of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we have provided some general comments below, which we hope will be of some assistance to you.

A "qualified investment" for an RRSP trust is defined in subsection 146(1) of the Act. Shares that trade on a "prescribed stock exchange" (as listed in section 3200 of the Regulations) and "public shares" (as defined in subsection 89(1) of the Act) are considered qualified investments by virtue of paragraph 146(1)(a) of the Act and paragraph 4900(1)(b) of the Regulations, respectively. A share of a "small business corporation" (as defined in subsection 248(1) of the Act) may qualify as a qualified investment if the conditions set out in subsection 4900(12) of the Regulations are met. A share of the capital stock of an "eligible corporation" (as defined in subsection 5100(1) of the Regulations) may be considered a qualified investment if the conditions set out in paragraph 4900(6)(a) of the Regulations are met.

The foregoing comments are meant to provide a brief summary of some of the provisions in the Act and Regulations under which a share constitutes a qualified investment for an RRSP trust and should not be considered either comprehensive or all-inclusive. Ultimately, it is a question of fact whether particular shares are qualified investments for an RRSP trust, and such a determination would require a thorough review of all of the facts.

If convertible shares, which are held by an RRSP trust as qualified investments, are later converted into other securities, it would have to be determined, at the time of conversion, whether these other securities are qualified investments for the RRSP trust. In this regard, one would have to consider the rules in the Act and Regulations that apply at the time of conversion.

Pursuant to paragraph 4900(1)(e) of the Regulations, a warrant or right is a qualified investment for an RRSP trust if it gives the owner the right to acquire, either immediately or in the future, property that is a qualified investment.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate

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