15 October 1986 Income Tax Severed Letter 5-1732 - []

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.

XXXX

OCT 15 1986

Dear XXXX

We are writing in reply to your letter of June 10, 1986 in which you requested our comments in respect of certain debit balances or short security positions which may arise in self-directed registered retirement savings plans (the "plans"). We apologize for the delay in our reply.

In your letter, you indicate that investment dealers and brokers act as agents for the trustees of the plans and in this capacity have a responsibility to review and control the activity being processed through plan accounts to assure that the activity complies with all relevant aspects of the Income Tax Act (the "Act"). At the same time they have a duty to the annuitant, their client, to ensure that the operation of the plan account is conducted in such a manner that the annuitant's benefits from the plan are maximized.

There are certain situations where particular interpretations of section 146 of the Act could lead to inequitable results for the client, results which you believe were not intended when section 146 was drafted. These situations, which may arise from time to time, are as follows:

(i) When an annuitant transfers a plan from one financial institution to another in accordance with the provisions of subsection 146(16) of the Act, a considerable length of time may pass before the transfer of the plan is effected. During this transfer period, which may last as long as eight to ten weeks, the annuitant is generally somewhat restricted by the transferring financial institution from operating the plan in the normal manner. To alleviate the inequity of this situation, investment dealers and brokers in their capacity as agent for the trustee to whom the plan is being transferred, would like to permit the annuitant to conduct investment transactions in the new plan. These transactions would not represent increases in the assets of the two plans combined, rather they would cause changes in the mix of qualified investments in the plan being transferred. These transactions might include sales of securities in the new plan which represent liquidation of the same security held in the plan being transferred, or purchases of securities in the new plan which will be paid for by cash held in the plan being transferred.

If the investment dealer or broker permits the investment transactions discussed above to take place, then there may exist in the new plan a debit balance or short security position. On the surface, these debit balances or short security positions would appear to be a loss to the trust by the agent investment dealer or broker, and might therefore be interpreted as being in contravention of paragraph 146(4)(a), subsection 146(10) or subsection 146(13) of the Act. Furthermore, the existence of a short security position might be interpreted as an indication that the trust is carrying on business in contravention of paragraph 146(4)(b) of the Act.

In your opinion, debit balances or short security positions which arise in the circumstances described above are not loans to the trust and do not constitute carrying on business, and do not cause any of subsections 146(4), 146(10) or 146(13) to be operative. Your conclusion is based on the fact that total plan assets are not increased by the transactions in the new plan, and at such time as the transfer of the plan is effected, any debit balance or short security position which may have arisen in the new plan is eliminated by the assets transferred from the old plan. The discussion above is based on the assumptions that a form T2033 has been completed, signed by the annuitant, and is in possession of the investment dealer or broker prior to any investment transactions being executed in the new plan and that the investment dealer or broker as agent has taken reasonable steps to ensure that the assets being transferred from the old plan are sufficient and appropriate to eliminate any debt balances or short positions which may arise in the new plan.

(ii) Situations may arise where annuitants of a self-directed plan have given instructions to the investment dealer or broker as agent to sell a qualified investment held in the plan, and simultaneously purchase another qualified investment with the proceeds of the sale. In the normal course, the sale transaction may not be affected by the agent on the date requested by the annuitant. This delay may result from processing constraints of the agent, or simply the passage of time required for the investment dealer or broker to effect the sale with the appropriate third party. Normally, delays in affecting the sale would be short in duration.

An a result of the delay between the date the annuitant has requested a sale to take place and the date that the sale is effected, a debit balance may arise in the plan because the purchase transaction requested by the annuitant has settled prior to the proceeds from the sale being realized. This debit balance may be construed as a loan which would contravene subsections 146(4), 146(10) or 146(13) of the Act.

It is your contention that the debit balance which may arise in the manner described above is not a loan to the trust by the agent in that the annuitant has given instruction to liquidate by sale one investment, the proceeds of which are to be used to purchase another investment. You feel that the debit balance which may arise in this manner is temporary in nature and should not cause any of subsections 146(4), 146(10) or 146(13) of the Act to be operative.

With respect to the situation described in (1) above, it is our understanding that there will be a change in the investment dealers and brokers in addition to the change in trustees of the plans and that the debit balances may be outstanding for lengthy periods of time and such balances may involve large sums of money. Although not mentioned, we also presume that in order to protect the financial position of the investment dealers and brokers, they will have to negotiate agreements with the new plans which will contain terms of lending limits, collateral, interest charges, etc. For these reasons, we feel that the arrangements resulting in the debit balances and short security positions described in (i) above would, in all likelihood, constitute "borrowing money" or "using plan property as security for a loan" and thus, the provisions of paragraph 146(4)(a) or 146(10)(b) of the Act, respectively, would apply.

Although it is a question of fact whether a plan is carrying on business which can only be determined after considering all of the facts and circumstances, it is our view that a plan would not be considered to be carrying on a business merely because of a short security position arising in the circumstances described in (i) above.

With respect to the situation described in (ii) above, it is our view to regard this type of debit balance as a "technical overdraft" which does not constitute "borrowing money" or "using plan property as security for a loan" for the purposes of paragraph 146(4)(a) or 146(10)(b) of the Act, respectively, provided that the debit balance is temporary, covered without undue delay and does not have the character of drawing on a line of credit.

XXXX

On the other hand, in a situation where the facts clearly indicate that as investment dealer or broker has entered into an agreement with a plan providing for line of credit limits for lengthy periods of time, interest charges on debit balances, the use of plan property as collateral, etc., it is our opinion that the provisions of paragraph 144(4)(a) or 146(1O)(b) of the Act would be applicable.

We trust our comments will be of same assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch