18 December 1992 Income Tax Severed Letter 9232105 - Qualified Investments in an RRSP

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.

5-923210
M.P. Baldwin
19(1) (613) 957-8953

December 18, 1992

Dear Sirs:

• Re: Qualified Investments in an Registered Retirement Savings Plan (RRSP)
• This is in reply to your letter of October 23, 1992 in which you requested our comment on whether or not a particular transaction would be a qualified investment for an RRSP.
• As noted in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling request.
• While you may, if you so desire, request an advance ruling, we must note that the eligibility of debt or shares of a corporation as qualified investments for an RRSP is a question of fact which, generally, may only be determined at the time of their acquisition by an RRSP. Accordingly, a ruling can only be provided beforehand if it can be shown that the debt or shares will be qualified at the time of acquisition.
• While we are unable to provide you with written confirmation regarding the plan described in your letter at this time, we are able to provide you with the general comments, that follow below, which may or may not be applicable to the circumstances of your particular situation.
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• 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 it is a “Public Corporation” as defined in the Income Tax Act (the “Act”). It should be noted that for purposes of the Act, life insurance corporations are considered to be public corporations.
• 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.
• 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,
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• (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.
• 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 will be of assistance to you.
• The above comments do not reflect any proposed changes to be made to the Income Tax Act or Income Tax Regulations as a result of the Minister of Finance's Economic Statement on December 2, 1992 in which he announced measures to assist small business financing.
• The above comments are an expression of opinion only and do not bind the Department.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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