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: 1. Interaction between Part XI tax on excess foreign content of an RRSP and Part XI.I tax on non-qualifying investments of an RRSP;
2. Any transitional rules or relief from the application of these two taxes;
3. Transitional relief on non-qualified investments consisting of shares trading on an Over-the-Counter Bulletin Board ("OTC BB").
Position: 1. Part XI imposes a 1% tax at the end of each month on the cost amount of foreign property in excess of 30% of the cost amount of all property of the RRSP; Part XI.1 imposes a 1% tax at the end of each month on the fair market value at the time of acquisition of the property of an RRSP that is not a qualified property.
2. When a property is a foreign, non-qualified investment, only the Part XI.1 tax on the non-qualified investment will apply. There is also a 24-month relief period associated with the foreign content rule.
3. The shares were deemed to be a qualified investment, provided certain conditions are met
Reasons: 1. Sections 205, 206 and 207.1;
2. Subsection 206(2).
3. Paragraph 4900(1)(s) deems securities quoted on the OTC BB, 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. 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.
XXXXXXXXXX 2004-007561
C. Lalonde
December 22, 2004
Dear XXXXXXXXXX:
Re: Part XI.1 Tax on Non-Qualified Investments
This is in response to your letter of May 5, 2004 requesting our views on the application of Part XI.1 tax in a situation where an investment in a registered retirement savings plan ("RRSP") becomes non-qualified as a result of a corporate reorganization in which shares of a Canadian corporation trading on a prescribed stock exchange are exchanged for shares of a U.S. corporation trading on an Over-the-Counter Bulletin Board ("OTC-BB") facility.
You also asked us whether there is any grandfathering rule under the Income Tax Act (the "Act") which provides relief from the application of Part XI.1 tax in order to allow the RRSP sufficient time to bring its investment on-side.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address:
http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.
As outlined in paragraph 5 of the Interpretation Bulletin IT-320R3, entitled "Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds", shares of a corporation that are listed on a prescribed stock exchange are "qualified investments" for purposes of an RRSP. We note that the OTC-BB is not a prescribed stock exchange and an investment in the shares of a U.S. corporation trading on an OTC-BB is not a qualified investment.
Generally, Part XI.1 of the Act imposes a tax at the end of each month on a plan trust in respect of its property that is not a qualified investment. An RRSP is required to pay a tax in respect of each month of 1% of the fair market value at the time of acquisition of the property that the trust holds that is not a qualified investment. Similar rules apply also with respect to property that is not a qualified investment of a deferred profit sharing plan, investments of a registered retirement income fund or of a registered educational savings plan.
The grandfathering rules you are alluding to in your letter, are likely the transitional relief provisions in paragraph 4900(1)(s) of the Income Tax Regulations (the "Regulations"). This paragraph deems securities quoted on the OTC-BB operated by NASDAQ Stock Market, Inc. or on the OTC 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. The rules in paragraph 4900(1)(s) were introduced when the Department of Finance became aware that many institutions believed that such shares were qualified investments and many individuals held such shares in their RRSPs. These rules were introduced as a temporary measure to provide relief from the Part XI.1 tax by allowing 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, an 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.
In your letter, you also asked us to comment on the 24-month relief period associated with the foreign content rule. Briefly, Part XI of the Act provides that, where at the end of any month after 2000 the total cost amount of foreign property exceeds generally 30% of the cost amount of all property held in the RRSP at that time, the taxpayer is subject to a tax of 1% of the lesser of the excess and the total of the cost amounts of all foreign properties acquired after June 18, 1971. When a particular property is a foreign, non-qualified investment, only the tax on non-qualified investments will apply. The Act further provides relief from Part XI tax if a property held by an RRSP continues to be a qualified investment for an RRSP but becomes a foreign property. In such a situation, the cost amount of the property will not be included in the calculation of Part XI taxes on excess foreign property for a period of 24 months in order to allow the plan to dispose of the property. Paragraph 8 of IT-412R2, entitled "Foreign Property of Registered Plans", provides more comments on the foreign property rules and on exchanges of securities.
It should be noted that there is no similar 24-month relieving provision from the application of Part XI.1 tax with respect to property that is not a qualified investment.
We trust that these comments will be of assistance.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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