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 G. Kauppinen (613)957-3495
April 28, 1988
Dear XXXX
This is further to our telephone conversation of April 6, 1988 XXXX Kauppinen) regarding investments by registered retirement savings plans ("RRSPs") in the shares of a Canadian company which are unlisted but are traded "over-the-counter".
As discussed, the shares of such a company will qualify as an investment for RRSPs if the company is already, elects to be, or is designated by the Minister to be a public corporation (even if those shares are not listed on a prescribed stock exchange). We refer you to Interpretation Bulletin IT-320R , "Registered Retirement Savings Plans - Qualified Investments", at paragraph 5 therein, and Interpretation Bulletin IT-391 , "Status of Corporations", at paragraphs 3 and 4 therein (copies enclosed).
We also enclose for your information Form T2073, "Election To Be A Public Corporation."
If the company is not "public", its shares may still be a qualified investment for RRSPs if the rules regarding "small business corporations" in subsection 4900(6) through section 5103 of the Income Tax Regulations ("Regulations") are satisfied.
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 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 or a non-resident controlled corporation.
Qualifying active business at any time means any business carried on primarily in Canada other than a business (other than the business of leasing property other than real property) the principal purpose of which is to derive income from property (including interest, dividends, rent and royalties) or a business of deriving gains from the disposition of property (other than property in the inventory of the business).
An active business will be considered to be carried on primarily in Canada if at least 50% of the full time employees of the corporation and all related corporations employed in the business are employed in Canada, or if at least 50% of the wages paid to employees of the corporation and all related corporations employed in the business are attributable to services rendered in Canada. If neither test is met, the determination of whether a business is carried on primarily in Canada is a question of fact.
Secondly, the annuitant of the RRSP must not be a "designated shareholder" of the corporation as defined by subsection 4901(2) of the Regulations. Among other things, a "designated shareholder" includes a taxpayer who does not deal at arm's length with the corporation pursuant to paragraph 4901(2)(e) of the Regulations. Moreover, a "designated shareholder" includes a taxpayer who holds 10% or more of any class of the corporation's shares where the aggregate investment by the taxpayer, the RRSP of which he is the annuitant and any person related to the taxpayer (and their RRSP's) is more than $25,000 pursuant to paragraph 4901(2)(a) of the Regulations. Where the aggregate investment by all of those persons in a related group of eligible corporations is less than $25,000, the group may own up to 50% of the shares of any class of the corporation, provided the group is at arm's length with the corporation.
Due to the detail and complexity of the Regulations regarding "small business corporations", we caution that the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances should they be considered to be either comprehensive or all inclusive.
Should you require additional information, please contact Mr. Kauppinen at the telephone number noted above.
We trust the foregoing is of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate
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