18 April 1988 Income Tax Severed Letter 5-5727 - [Qualified Investments of a self-directed RRSP]

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.

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F. Francis (613)957-3498

XXXX

April 18, 1988

Dear Sirs:

Re: Qualified Investments of a self-directed registered retirement savings plan ("RRSP")

This is in reply to your letter of March 10, 1988, wherein you requested a technical interpretation with respect to the provisions of section 4900 of the Income Tax Regulations (the "Regulations").

You specifically enquire as to whether the shares of a corporation will be a qualified investment of a self-directed RRSP in the following situation:

- the annuitant deals at arm's length with the corporation

- the annuitant owns between 10% and 50% of the shares of the corporation

- the cost amount of the said shares is more than $25,000.

For a small business corporation's shares to be a qualified investment for an RRSP the corporation first must be an "eligible corporation" as defined in subsection 5100(1) of the Regulations. This is generally a taxable Canadian corporation where substantially all of the property owned by the corporation is used in a "qualifying active business" in Canada, as also defined in subsection 5100(1) of the Regulations.

Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt and non-resident controlled corporations.

Secondly, the annuitant of the RRSP must not be a "designated shareholder" of the corporation as defined by subsection 4901(2) of the Regulations. Pursuant to paragraph 4901(2)(a) of the Regulations, a designated shareholder includes a "specified shareholder" of the corporation unless the aggregate investment by the taxpayer in the shares of the capital stock of the corporation and any related corporations is less than $25,000.

The term "specified shareholder" is defined under subsection 248(1) of the Income Tax Act (the "Act") to mean a taxpayer who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of the capital stock of the corporation or a related corporation.

As a consequence thereof, where the aggregate investment in an eligible corporation by the taxpayer is more than $25,000 and he owns 10% or more of the shares of any class of the shares of the corporation, notwithstanding that the taxpayer is at arm's length with the corporation, he will be a designated shareholder as defined.

In our opinion therefore, the annuitant in the above situation would be considered to be a "designated shareholder" by virtue of paragraph 4901(2)(a) of the Regulations. As a consequence thereof, the shares of the corporation would not be a qualified investment for the annuitant's RRSP for purposes of paragraph 146(l)(g) of the Act.

Furthermore it should be noted that, purusant to paragraph 4901(2)(e) of the Regulations, a "designated shareholder" will include a taxpayer who does not deal at arm's length with the corporation, notwithstanding the cost amount of his investment in shares or his percentage interest in the shares of the corporation.

The above comments are an expression of opinion only and are not binding on the Department. They are, however, our best interpretation of the relevant legislation as it applies generally and we trust they are of assistance to you.

Yours truly,

for Director Financial Industries Division Rulings Directorate