19 April 1990 Internal T.I. 59829 F - Eligible Investments in RRSPs

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.

April 19, 1990

Dear Sirs:

This is in reply to your letter of February 7, 1990 to our T2 Correspondence Unit of the Ottawa Taxation Centre.  This letter was referred to us for reply on March 27, 1990.

In your letter you have requested information pertaining to the qualification of your company as an eligible investment for an RRSP.  In this regard you appear to indicate that 24(1) is a legally incorporated Canadian Controlled Private Corporation (a "CCPC"), however, you also state that financing will be through a limited partnership in which shares are sold in exchange for equity.  We will therefore attempt to clarify the provisions of the Income Tax Act (the Act) as they pertain to both circumstances.

The Department does not certify and cannot provide any other form of assurance that shares of a CCPC would be qualified investments of an RRSP as this may only be decided on the basis of the facts as determined at the time of acquisition of the shares by a plan.

Generally an RRSP can invest in share of a corporation if the shares are listed on a prescribed stock exchange in Canada or in a country other than Canada or if the corporation is a "public corporation" as defined in the Act.

When the shares of the corporation do not qualify as noted above and they are shares of a CCPC they may however qualify if they are shares of an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that company.  These latter two terms are defined terms and their meanings are provided in sections 4900 through 5103 of the Income Tax Regulations (Regulations).

In brief, an eligible corporation is generally a taxable Canadian corporation which uses substantially all of its property in a "qualifying active business".  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 also a defined term which 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.

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, or

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

In addition to investing directly in eligible corporations, an RRSP is permitted to own units of "small business investment limited partnerships" ("SBILP") as defined in subsection 5102(1) of the Regulations.  The rules, in general, allow an RRSP to invest in an SBILP which holds "small business securities" which are shares of an "eligible corporation", if there are more than 10 limited partners and no one partner or group of related partners holds more than 10 of the partnership units.

Due to the detail and complexity of the regulations regarding these issues, the foregoing comments are intended to only provide an overview of the relevant provisions and should not be considered as comprehensive or all inclusive.

The Department does not provide copies of the provisions of the Act or its Regulations but these may be acquired through any Canadian Government Publishing Centre.  A number of publishers also provide consolidated versions of the Act and Regulations which are generally available through local business libraries.  You may also find useful, an article by Michael P. Redden:  "Investment in Small Business through Registered Retirement Savings Plans". Canadian Tax Journal, Vol. 36, No. 4, July-August 1988, Page 992.

We hope our comments will be of assistance to you.

Yours truly,

for  DirectorFinancial  Industries DivisionRulings Directorate