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. Whether an investment acquired before March 23, 2011 by an RRSP or RRIF that was a qualified investment because of subsection 4900(12) of the Regulations will continue to retain its qualified investment status under that provision after March 22, 2011. 2. Whether section 5001 of the Regulations can apply to cause such an investment to become a prohibited investment after March 22, 2011. 3. Does the relieving rule in subsection 207.04(3) of the Act apply to an investment acquired before March 23, 2011 that was both a prohibited and non-qualified investment on that date?
Position: 1. Yes. 2. No. 3. No.
Reasons: Application of the law and coming-into-force provisions in Bill C-13.
XXXXXXXXXX
2011-042604
D. Wurtele
February 21, 2013
Dear XXXXXXXXXX:
We are writing in response to your letter concerning amendments to the investment rules for registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) that were announced in the 2011 federal budget and enacted as part of Bill C-13. In particular, you requested our comments on the application of these rules in two scenarios involving shares of a corporation that were acquired by an RRSP before March 23, 2011.
In the first scenario, the corporation was a specified small business corporation at the time the shares were acquired by the RRSP and therefore the shares were a qualified investment for the RRSP under subsection 4900(12) of the Income Tax Regulations (the "Regulations"). The corporation is currently in the process of winding-up and has not been a specified small business corporation since late 2010 when it sold the majority of its business assets. Since the conditions in subsection 4900(12) only had to be met at the time of acquisition of the shares by the RRSP, the winding-up did not have any impact on the qualified investment status of the shares under the old rules. However, you are concerned about the potential application of the rules in Bill C-13 and would like confirmation that, after March 22, 2011, the shares continue to be a qualified investment, and are not a prohibited investment under paragraph (d) of the definition of that term in subsection 207.01(1) of the Income Tax Act (the "Act"), for the RRSP.
In the second scenario, the shares of the corporation were never a qualified investment for the RRSP as the conditions in subsection 4900(12) were not met because a person related to the annuitant owned more than 10% of the corporation's shares. The shares also constitute a prohibited investment for the RRSP because of subparagraph (b)(i) of the definition, with effect after March 22, 2011. You are concerned that the application of the coming-into-force provisions in Bill C-13 may result in the income earned by the RRSP trust after March 22, 2011, including the portion of the capital gain accrued after March 22, 2011, on its shares of the corporation being subject to tax both as an advantage under section 207.05 of the Act and also under existing subsection 146(10.1) of the Act.
Our Comments
Your letter describes factual situations involving specific taxpayers. As explained in Information Circular 70-6R5, it is not our practice to comment on the tax consequences applicable to a specific taxpayer in particular circumstances except in the form of an advance income tax ruling. We can, however, offer the following general comments.
The amendments in Bill C-13, which restricted the application of subsection 4900(12) to registered education savings plans and expanded the application of a similar qualified investment rule in subsection 4900(14) of the Regulations to RRSPs and RRIFs, are applicable only in respect of investments acquired after March 22, 2011. Consequently, an investment acquired before March 23, 2011 by an RRSP or RRIF that was a qualified investment because of subsection 4900(12) will continue to retain its qualified investment status under that provision after March 22, 2011.
Paragraph (d) of the definition "prohibited investment" in subsection 207.01(1) includes prescribed property. Section 5001 (footnote 1) of the Regulations prescribes for this purpose certain small business, venture capital and co-operative investments that are qualified investments solely because of subsection 4900(14), but which no longer satisfy the applicable qualification conditions. For example, a share of a corporation that ceased to be a specified small business corporation because it no longer met the "active business" test would become a prohibited investment pursuant to these provisions. However, section 5001 will not cause an investment acquired before March 23, 2011 that continues to be a qualified investment under subsection 4900(12) to become a prohibited investment. This is because the investment is qualified because of subsection 4900(12), not subsection 4900(14).
Subsection 207.04(3) of the Act applies where an RRSP or RRIF holds a property that is both a non-qualified and prohibited investment. In these circumstances, the property is deemed not to be a non-qualified investment and therefore any income earned and capital gains realized on such a property will not be subject to tax in the hands of the RRSP or RRIF trust under subsection 146(10.1) or 146.3(9) of the Act. (The property remains a prohibited investment subject to the rules in Part XI.01 of the Act.) However, this relieving provision does not apply in respect of investments acquired before March 23, 2011 except in the situation where the investment first became prohibited after October 4, 2011 or first became non-qualified after March 22, 2011. Consequently, an investment that first became prohibited or non-qualified before those respective dates will not benefit from this provision. As a result, income earned by an RRSP or RRIF trust after March 22, 2011, and the portion of a capital gain accrued after March 22, 2011, on such an investment may be subject to tax both as an advantage under amended section 207.05 of the Act and also under existing subsection 146(10.1) or 146.3(9).
The RRSP or RRIF annuitant may be able to mitigate this somewhat unusual situation by means of the transitional relief under 207.05(4) of the Act. To the extent that this is not possible, the annuitant may wish to request a waiver under 207.06(2) of the Act. This provision gives the Minister of National Revenue authority to cancel or waive all or part of the taxes on prohibited investments and advantages in appropriate circumstances, taking into account factors such as reasonable error and whether the transaction or series of transactions that gave rise to the tax also resulted in another tax being payable under the Act. Detailed information concerning the transitional relief and the procedures for requesting a waiver is provided in IT Rulings documents 2011-041816 and 2011-043014, which we understand you have access to.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the Canada Revenue Agency in respect of any particular situation.
Yours truly,
Mary Pat Baldwin, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 A draft amendment released by the Department of Finance on December 21, 2012 proposes to re-number section 5001 as subsection 4900(15) of the Regulations.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013
Email this Content