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 an RRSP or RRIF annuitant would be subject to the 50% tax on prohibited investments if the RRSP or RRIF were to acquire a prohibited investment by exercising a warrant that itself constitutes a prohibited investment but that was acquired before March 23, 2011.
Position: Yes.
Reasons: See response
CICA CRA Roundtable - September 2012
Question 9 RRSP prohibited investments and warrants
Background
- A registered retirement savings plan (RRSP) holds shares of a particular corporation. These shares are "prohibited investments" for the RRSP as defined by subsection 207.01(1) of the Act. These shares were acquired by the RRSP before March 23, 2011.
- The RRSP also holds warrants that entitle the RRSP to acquire additional shares of the corporation referred to in fact 1 above. These warrants were acquired by the RRSP before March 23, 2011.
- Subsequent to March 22, 2011, the RRSP exercises these warrants thus acquiring more shares of the particular corporation. The shares acquired upon exercise of the warrants are prohibited investments.
Question
Will the tax payable on prohibited investments pursuant to subsection 207.04(1) apply to the shares acquired subsequent to March 22, 2011 upon the exercise of the warrants notwithstanding the fact that the warrants themselves were acquired before March 23, 2011?
CRA Response
If a trust governed by an RRSP or a registered retirement income fund (RRIF) acquires a prohibited investment or if an existing investment becomes prohibited, subsections 207.04(1) and (2) of the Act provide that the RRSP or RRIF annuitant is subject to a tax equal to 50% of the fair market value of the investment. The tax applies only to RRSP and RRIF investments acquired after March 22, 2011, subject to certain exceptions that are not relevant to the question at hand.
When an RRSP or RRIF trust exercises a warrant and purchases additional shares of the issuing corporation, the RRSP or RRIF trust is considered to have acquired those shares. Consequently, if the shares are a prohibited investment for the RRSP or RRIF trust and the acquisition of the shares occurs after March 22, 2011, the 50% tax on prohibited investments will apply, based on the fair market value of the shares at the time of acquisition. The fact that the tax did not apply to the warrants, because they were acquired before March 23, 2011, is not relevant to this determination. The same result would apply in the context of options, convertible securities and other exchanges of securities.
Dave Wurtele
613-957-2093
2012-045330
September 12, 2012
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