9 December 1991 External T.I. 9122875 F - RRSP Investment in Shares — Designated Shareholder

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.

5-912287

Dear Sirs:

This is in reply to your letter of August 15, 1991 and further to our (19(1)/Delorey) telephone conversation on November 28, 1991 concerning qualified investments for a registered retirement savings plan ("RRSP").

You are enquiring further concerning the shares of  24(1) both of which are private Canadian companies.   More particularly, you seek clarification of parts (a), (d) and (e) on page 2 of our letter of May 2, 1991 concerning the meaning of "designated shareholder", which meaning was described as follows:   

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

Also, you ask if there are any provisions for small corporate businesses, in addition to those explained in our letter of May 2, 1991 and discussed above, that may qualify the shares of 24(1) for RRSP purposes.

Our Comments

As mentioned during our telephone conversation, each of (a) to (e) above are mutually exclusive.  Thus, if any one of (a) to (e) applies with respect to a particular individual, the shares of24(1) would not be a qualified investment for that individual's RRSP.

With respect to (a) above, the words "of the corporation" in line 3 should read "of the corporation or a related corporation".  Thus, an employee of 24(1) would be a designated shareholder of 24(1) if the employee alone, or together with a person with whom the employee does not deal at arm's length, owns 10% or more of the shares of 24(1) or 24(1) unless the cost amount of those shares is, in total, less than $25,000.  If this "10% or more" rule applies to an employee, the shares of 24(1) would not be a qualified investment for the employee's RRSP or for the RRSP of any person related to the employee.

With respect to (d) above, the words "is or is related to an employee of the corporation" in line 1 should read "is or is related to an employee of the corporation or a corporation related thereto".  Thus, if a group of employees of 24(1) or 24(1) control, and that group does not include a person or a related group the controls 24(1), an employee of 24(1) and any person related to that employee would be a designated shareholder of.  If such is the case, the shares of would not be a qualified investment for the employee's RRSP or for the RRSP of any person related to the employee. 

24(1)

It is of course a question of fact as to who controls a corporation at any given time.  It has been our experience, however, that where a corporation is 100% employee owned, it will be the employees who control the corporation.

With respect to (e) above, subsections 251(1) and (2) of the Income Tax Act provide that

    (f)  an individual deals with a corporation at non- arm's length where

         (i)    the individual alone controls the corporation,

         (ii)   the individual is a member of a related group that controls the corporation, or

         (iii)  the individual is related to an individual described in (i) or (ii) above, and

    (g)  it is a question of fact whether individuals not related to each other were at a particular time dealing with each other at arm's length.

Other Provisions for Small Corporate Businesses

We commented in our letter of May 2, 1991 on what generally constitutes an eligible corporation.  Further to those comments, an eligible corporation would also include a "specified holding corporation", a "prescribed venture capital corporation" or, under draft Income Tax Regulations, a "registered labour-sponsored venture capital corporation". These terms are defined in the Income Tax Regulations or in the draft Regulations and we enclose photocopies of those Regulations for your information.  As indicated in our previous letter, the comments above and our previous comments concerning designated shareholders are relevant regardless of the type of eligible corporation involved.

Public Corporation

In our letter of May 2, 1991, we mentioned that shares of a "public corporation", as defined in paragraph 89(1)(g) of the Income Tax Act, are qualified investments for an RRSP. In this regard, 24(1) can elect to become a public corporation by filing a completed form T2073 with the District Taxation Office provided the following conditions are met at the time of the election:

1.        A class of shares of the capital stock of 24(1) shall be qualified for distribution to the public.

2.        Where the shares of the class referred to in 1 above are equity shares, there shall be no fewer than 150 persons, other than insiders of 24(1), each of whom holds

         (a)    at least one block of shares of that class, and

         (b)    shares of that class having an aggregate fair market value of at least $500.

3.        Where the shares of the class referred to in 1 above are other than equity shares, the comments in 2 above apply except that the reference to "150" persons should be read as a reference to "300" persons.

4.        Insiders of 24(1) shall not hold more than 80 percent of the issued and outstanding shares of the class referred to in 1 above.

If such an election is made, any shares of 24(1) acquired by an individual's RRSP after 24(1) becomes a public corporation would represent a qualified investment for the RRSP.  Further enquiries concerning this election should be addressed to the District Taxation Office.

Our comments reflect an expression of opinion only and are not binding on the Department, as explained in paragraph 21 of Information Circular 70-6R2.  We trust, however, that they are of assistance.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate