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.
Principal Issues:
General info. concerning RRSP investments in shares of CCPC.
Position TAKEN:
General info. provided.
Reasons FOR POSITION TAKEN:
Routine
XXXXXXXXXX 940885
Attention: XXXXXXXXXX
April 15, 1994
Dear Sirs:
Re: Eligible Investment for Registered Retirement Savings Plan (RRSP)
This is in reply to your facsimile transmission of April 8, 1994, in which you refer to our telephone conversation (XXXXXXXXXX/Spice) of the same date and request further information concerning the requirements of subsection 5100(1) of the Income Tax Regulations (the "Regulations").
Written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. While you may, if you so desire, request an advance ruling, please note that the eligibility of 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 shares will be qualified at the time of acquisition.
While we are unable to provide you with written confirmation regarding the situation described in our telephone conversation, we are able to provide you with the following general comments which may or may not be applicable to the circumstances of your particular situation.
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 (unless as otherwise stated all references to this statute are to the Income Tax Act S.C. 1970-71-72, c. 63 as amended, consolidated to June 10, 1993 - the "Act") - see the current version of Interpretation Bulletin IT-391 for more information on public corporation status. 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 the 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.
On December 2, 1992, the Department of Finance released "Draft Legislation and Regulations on Investment in Small and Medium-Sized Business". In this draft legislation new subsection 4900(12) of the Income Tax Regulations was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share. For this purpose, a "small business corporation" is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents. In addition, to qualify as a "small business corporation" all or substantially all of the fair market value of the corporation's assets must be attributable to assets that were:
a)used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,
b)shares or indebtedness of other small business corporations which were connected with the particular corporation, or
c)assets described in a and b above.
A "connected shareholder" of a corporation is a person who owns or has options to acquire, or who is a member of a related group which owns or has options to acquire, directly or indirectly 10% or more of the issued shares of any class of 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 should they be considered either comprehensive or all inclusive.
The above comments are an expression of opinion only and do not bind the Department. We trust, however, that they will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
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© Her Majesty the Queen in Right of Canada, 1994
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© Sa Majesté la Reine du Chef du Canada, 1994
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