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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
SUBJECT: RRSP INVESTMENT IN PRIVATE CORPORATION SECTION: REG 4900, REG 5103]
- 5- 921766 P. Spice (613) 957-8953 June 11, 1992
Dear 19(1):
This is further to our telephone conversation of June 9, 1992, (Spice/19(1)) in which you asked for information concerning the investment of RRSP funds in a private business. As we discussed, an RRSP trust may invest in shares of a private corporation.
Generally an RRSP can invest in shares 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 Income Tax Act (the "Act").
When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify if they are shares of a Canadian Controlled Private Corporation (CCPC) which is 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 (the "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 a business, the principal purpose of which is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying active 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) 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 under no circumstances are they to be considered to be either comprehensive or all inclusive. We trust, however, that they are of assistance.
The above comments are an expression of opinion only and do not bind the Department.
An advance ruling concerning a proposed investment by an RRSP may be provided by the Department if the facts can be determined with a degree of accuracy and will not be subject to change before the investment occurs. See paragraphs 7 and 14(j) of the enclosed Information Circular 70-6R2 concerning rulings on factual situations. You should also refer to the Circular to determine how to apply for an advance ruling. The current fee charged for a ruling is $90.00 per hour and a deposit of $450.00 is required with the ruling request.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 1992
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© Sa Majesté la Reine du Chef du Canada, 1992
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