10 February 1989 Income Tax Severed Letter 5-7418 - [Eligibility of Shares as an RRSP Investment]

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.

Revenue Canada Taxation Head Office

A. Seidel (613)957-8960

February 10, 1989

Dear Sir:

This is in reply to your letter dated January 18, 1989 with respect to the eligibility of Canadian shares as a qualified investment for a Registered Retirement Savings Plan ("RRSP") and, in particular, whether your company's shares are eligible.

Whether your company's shares are a qualified investment for an RRSP is a question of fact that can only be determined at the time of acquisition of the shares by an RRSP. The following general comments apply to the eligibility of Canadian shares of a small business corporation as a qualified investment for an RRSP.

Generally, the rules governing investments by an RRSP in a small business corporation are found in subsection 4900(6) through section 5103 of the Income Tax Regulations (the "Regulations").

For a small business corporation's share to be a qualified investment for an RRSP, the corporation must be an "eligible corporation" as defined in subsection 5100(1) of the Regulations. Pursuant to subparagraph 5100(l)(a)(i) of the Regulations, an eligible corporation is defined as a taxable Canadian corporation where substantially all of the property owned by the corporation is used in a "qualifying active business" in Canada. Pursuant to subparagraph 5100(1)(a)(ii) of the Regulations an eligible corporation is also defined to mean a taxable Canadian corporation where substantially all of the property owned by the corporation consists of shares of the capital stock of one or more eligible corporations that are related to it. 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.

A "qualifying active business" is defined in subsection 5100(1) of the Regulations. It generally includes any business which is carried on in Canada except one where its principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property, and a retail or wholesale business.

A corporation's business will be considered to have been carried on in Canada if at least 50% of its employees are engaged in the business in Canada or at least 50% of its salaries or wages are paid for services provided in Canada in respect of the business. If the corporation is part of a group of related corporations, the combined services of their employees and the combined salaries and wages paid must be considered in making this determination.

For a small business corporation's shares to be a qualified investment for an RRSP, 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 subsection 4901(2) of the Regulations, a designated shareholder of a corporation is any person who

(a) is, or is related to, a person who separately or together with any other related persons holds 10% or more of the shares of any class of shares of the corporation, unless the cost amount of those shares is, in total, less than $25,000. For this purpose, an annuitant of an RRSP and the RRSP itself are considered to be related persons.

(b) is or is related to a member of a partnership that controls the corporation in any manner,

(c) is or is related to a beneficiary under a trust that controls the corporation in any manner,

(d) is or is related to an employee of the corporation where the employees control the corporation, except where the corporation is controlled by one person or a related group of persons,

(e) does not deal at arm's length with the corporation.

Due to the detail and complexity of the Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and therefore are not to be considered to be either comprehensive or all inclusive.

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

for Director Financial Industries Division Rulings Directorate