12 April 1994 External T.I. 9400315 - RRSP QUALIFIED INVESTMENT - DEBT OF SMALL BUSINESS

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.

RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY

Principal Issues:

Can an RRSP make a qualified investment in a debt obligation of a small business corporation?

Position TAKEN:

No, not directly, but it can invest indirectly in certain such obligations through an interest in a limited partner in a small business investment limited partnership ("SBILT") or through an interest in a small business investment trust ("SBIT").

Reasons FOR POSITION TAKEN:

See qualified investments as listed in paragraph 146(1)(g) and subsection 204(e) of the Act and section 4900 of the Regulations. The interests in SBILTs and SBITs are prescribed to be qualified investments in subsection 4900(6) of the Regulations.

XXXXXXXXXX 940031

Attention: XXXXXXXXXX

April 12, 1994

Dear Sirs:

Re: Qualified Investments in Self-Directed Registered Retirement Savings Plans ("RRSPs")

This is in reply to your facsimile transmission received January 6, 1994 concerning the above-noted subject. Our comments below relate to your questions in the order in which you asked them. (Unless as otherwise stated all references are to the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act").)

You have asked, "Can an individual place cash (i.e. Canadian legal tender with a face value equal to its fair market value) into his RRSP and obtain an income tax deduction in the year the contribution is made?"

Provided the contribution of cash meets the requirements of subsection 146(5) or subsection 146(5.1) of the Act, the individual will be entitled to a deduction for the lesser of the cash contribution paid to the individual's or his spouse's RRSP in the year the contribution is made (or in the previous year if the contribution is made in the first 60 days of the subsequent year), and the individual's RRSP deduction limit.

We would note that such cash would also be a qualified investment for the RRSP. We refer you to paragraph 7 of Interpretation Bulletin IT-320R2 which states:

Money acquired after December 11, 1979 is a qualified investment under subparagraph 204(e)(i) only if it is legal tender in Canada. Money for this purpose does not include foreign currency nor does it include money whose fair market value exceeds its stated value as legal tender in Canada. Coins and collections of coins and currency whose fair market value is greater than its face value, precious metals such as gold and silver bullion and certificates in respect of gold and silver are all excluded, by virtue of paragraph 146(1)(g) and subparagraph 204(e)(i), from being qualified investments.

Your second question asks if a trust governed by an RRSP can make a "qualifying investment" in a debt obligation of an "eligible corporation".

It appears that you are confusing "qualified investment" as defined in paragraph 146(1)(g) of the Act with "qualifying obligation" which is defined for the purposes of Part LI of the Income Tax Regulations (the "Regulations") in section 5100. The latter definition is relevant for the purposes of the definition of a "small business security" in sections 5100 to 5104 of the Regulations.

Qualified investments of a trust governed by an RRSP are listed in paragraphs 146(1)(g) and 204(e) of the Act and section 4900 of the Regulations. Generally speaking, a debt owing by a corporation to a trust governed by an RRSP would represent a qualified investment of the trust only if the debt is:

(a)a bond, debenture, note, or similar obligation of a corporation the shares of which are listed on a prescribed stock exchange in Canada (subparagraph 146(1)(g)(ii) of the Act);

(b)a bond, debenture, note, mortgage, hypothec or similar obligation of a Canadian corporation which is controlled directly or indirectly by one or more corporations or mutual fund trusts whose shares or units are listed on a prescribed stock exchange in Canada (subparagraph 4900(1)(i)(ii) of the Regulations);

(c)a bond, debenture, note, mortgage, hypothec or similar obligation of a Canadian corporation which is guaranteed by a corporation or a mutual fund trust whose shares or units are listed on a prescribed stock exchange in Canada (subparagraph 4900(1)(i)(i) of the Regulations);

(d)a bond, debenture, note or similar obligation of a Canadian corporation where the conditions described in subparagraph 4900(1)(i)(iii) of the Regulations are met which, in part and in general terms, require the corporation to have share equity of at least twenty five million dollars or be controlled by such a corporation and have issued and outstanding debt of at least ten million dollars; or

(e)a bond, debenture, note, mortgage, hypothec or similar obligation of a corporation, as described in clause 212(1)(b)(ii)(C) (paragraph 204(e)(ii) of the Act).

There are other provisions which also allow RRSPs to hold debt of Canadian corporations. However, these are directed to particular types of corporations such as credit unions or cooperative corporations.

Proposed legislation would expand the types of debt which an RRSP may invest in:

(i)In a Press Release on February 4, 1993 (93-005), which was replaced by a Release on August 30, 1993 (93-053), the Department of Finance set out draft amendments concerning qualified investments for RRSPs. If the draft amendment to include paragraph 4900(1)(c.1) of the Regulations is enacted as proposed, a bond, debenture, note or similar obligation of a public corporation (other than a mortgage investment corporation) will be a qualified investment for an RRSP, effective after 1992; and

(ii)As announced in a Press Release on June 21, 1993, the Department of Finance intends to amend the Regulations to include as investments which will qualify for RRSP purposes debt obligations of corporations whose shares are listed on a prescribed foreign stock exchange. It is proposed that this amendment, when enacted, will have effect from June 21, 1993.

In addition, an RRSP may invest indirectly, through an interest of a limited partner in a small business investment limited partnership ("SBILP") or through an interest in a small business investment trust ("SBIT"), in certain subordinated debt obligations of "eligible corporations" (as defined in subsection 5100(1) of the Regulations) which meet the definition of a "small business security" in subsection 5100(2) of the Regulations, provided, with minor exceptions, that the partnership or trust was the first person to acquire such securities and has held them continuously since their acquisition. SBILPs and SBITs are defined in sections 5102 and 5103 of the Regulations respectively. An interest of a limited partner in an SBILP and an interest in an SBIT are prescribed to be qualified investments for the purposes of subparagraph 146(1)(g)(iv) of the Act pursuant to paragraphs 4900(6)(b) and (c) of the Regulations, subject to the rules in subsections 4900(8) and (9) of the Regulations.

Note that the definition of "small business security" includes both certain debt obligations of eligible corporations pursuant to 5100(2)(b) (provided the tests in 5100(2)(e) and (f) are met), and qualifying obligations (as defined in subsection 5100(1)) pursuant to 5100(1)(g) of the Regulations.

In summary, direct investment by an RRSP in debt obligations of an eligible corporation or in "qualifying obligations" is not possible. However, an RRSP may invest indirectly in such debt through an SBILP or an SBIT.

You also ask if the ability of a trust governed by an RRSP to invest in "small business property" is restricted to those situations in which the trust is subject to Part XI tax on its foreign property or if instead the trust can invest in "small business property" in the absence of any foreign property investments.

"Small business property" is defined in subsection 206(1) of the Act and, as noted in the preamble to that subsection, is only relevant for the purposes of Part XI of the Act. A trust governed by an RRSP may increase its investment in foreign property beyond the usual limit if it also makes investments in "small business property". Such a trust may increase its investment in foreign property by the lesser of three times the "small business investment amount" and 20% of the cost amount of all property. However, this definition of "small business property" is not relevant for the purposes of whether a debt will be a "qualified investment" for purposes of an RRSP.

Our comments are 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 Director
Financial Institutions Division
Rulings Directorate