13 September 1994 Ministerial Correspondence 9417144 - DEBT INVESTED IN U.S. AS RRSP QUALIFIED INVESTMENT

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:

Whether debentures are a qualified investment for an RRSP.

Whether debentures are foreign property for an RRSP.

Position TAKEN:

Yes. Yes.

Reasons FOR POSITION TAKEN:

Meets the wording of Reg. 4900(1)(i)(ii) and nothing prevents the proceeds of debentures being reinvested by debtor in non-qualified investments, namely in a loan to a U.S. corporation; "portfolio investments" as used in paragraph 206(1)(d.1) includes all securities held by an investor.

			September 13, 1994

	GAAR Committee	Rulings Directorate
			Financial Industries
			  Division
P. Spice

			941714

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The Vancouver District Office has forwarded us a copy of an Offering Memorandum of the above-named corporation and asked for our views on the debentures described in the Memorandum.

ISSUE

Are the debentures "qualified investments" for registered retirement savings plans (RRSP's) pursuant to paragraph 146(1)(g) of the Act and "foreign property" as defined in subsection 206(1) of the Act.

FACTS

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TAXPAYER'S REPRESENTATIONS

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AVOIDANCE AND TAX BENEFIT

An RRSP may invest in qualified investments and neither the cost of the investment nor the return on the investment will be taxable to the annuitant or to the RRSP. Neither debt of a foreign corporation nor foreign partnership interests are qualified investments for an RRSP and if purchased directly by the RRSP the annuitant would be required to include the fair market value of the properties at the time they are acquired in income for the year of their acquisition pursuant to subsection 146(10) of the Act. When the RRSP disposes of a non-qualified investment, the annuitant gets a deduction from income in the year of the disposition equal to the lesser of the amount included previously under subsection 146(10) and the proceeds of disposition.

If a property is a non-qualified investment, it is excluded from the category of foreign property that is subject to the tax on foreign property in excess of 20% of the aggregate of the RRSP's cost amounts of all its properties. If it is a qualified investment, an RRSP can hold up to 20% of the cost amount of all of its properties in foreign properties without penalty. Excess foreign property values are subject to a 1% per month tax payable by the RRSP trust.

ANALYSIS

We cannot determine if the main purpose for structuring the transaction in this manner is to permit RRSP's to invest in debt of a foreign corporation (or in the foreign real estate which underlies the foreign debt) and escape section 146(10) tax. In any event the qualified investment rules (i.e., paragraph 4900(1)(i) of the Regulations) permit RRSP's and other deferred income plans to invest in the debt of Canadian corporations so long as those Canadian corporations are 1) widely-held, or 2) are controlled by corporations whose shares are listed on prescribed stock exchanges in Canada, or 3) if payment of the principal of, and interest on, the debt is guaranteed by a corporation or mutual fund trust whose shares are on a prescribed stock exchange in Canada. The qualified investment rules are in place to limit the degree of risk of investments meant to provide retirement income; there is nothing in the rules, however, prohibiting the Canadian corporation from investing the proceeds of its debt in something that is a non-qualified investment.

Thus, the ability of an RRSP to invest indirectly in a non-qualified investment through a qualified investment is not inherently offensive.

With respect to the foreign property issue, the Department has decided that "portfolio investments" as used in subsection 206(1) of the Act takes on its common dictionary meaning of "all the securities held by an investor". The interpretation is, perhaps, coloured by the use of this term in paragraph 94.1(1)(b) of the Act where certain properties listed as portfolio investments could be considered properties used in an active business. (See Department's Response to Question 43, 1990 CTF Round Table and documents 930189 and 3-2759). In any event, the Department has resisted restricting the term as is done in the CICA handbook so as to include only passive investments (see Department's Response to Question 19, 1986 CTF Round Table and documents 942133 and 930306, although in document 900245 we state that loans made by a Canadian corporation in the course of carrying on the business of lending money would not be considered a portfolio investment). We are not aware of any cases providing a judicial interpretation of the meaning of "portfolio investments" as used in section 206 of the Act.

RECOMMENDATION

Given the wording of the Act with respect to qualified investments and the absence of any indication through these provisions that these types of secondary investments are targeted by the rules, we are of the opinion that GAAR cannot be applied to this situation.

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Section Chief
Deferred Income Plans Section
Rulings Directorate
Policy and Legislation Branch