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.
Whether certain shares are qualified investment for an RRSP.
General information concerning RRSP investments in shares of CCPC.
Reasons FOR POSITION TAKEN:
XXXXXXXXXX L. Roy
September 2, 1994
Re: Eligibility of Canadian Company for a RRSP
This is in reply to your facsimile of August 8, 1994 in which you requested our opinion on whether a share of a Canadian Company is a qualified investment for an RRSP.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. 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. Nevertheless, we offer you the following general comments which may not be applicable to the circumstances of your particular situation.
In order to determine whether or not the company you described in you letter is a Canadian controlled private corporation, we refer you to Interpretation Bulletin IT-458R which we have enclosed with this letter.
Regarding the shares as eligible investment for an RRSP, shares of a CCPC qualify as investments if they are shares of 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 subsections 5100(1) and 4901(2) of the Income Tax Regulations ("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 other than property in the inventory. A qualifying business may, however, include a business of leasing property other than real property, and a retail or wholesale business.
For the purpose of the definition of qualifying active 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.
When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify if the new subsection 4900(12) of the Regulations applies. Under subsection 4900(12) of the Regulations, a share of the capital stock of a "small business corporation" is 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 which is not directly or indirectly controlled by one or more non-residents at the time the share was acquired by the trust. In addition, all or substantially all of the fair market value of the corporation's assets must be attributable to its 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.
For the above purpose, an active business is any business carried on by a taxpayer other than a business the principal purpose of which is to derive income from property, unless the taxpayer employs in the business more than five full-time employees or an associated corporation does not provide managerial, administrative, financial maintenance or other similar services which, if not provided would require the corporation to employ more than five full-time employees.
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.
A share which is qualified for investment by an RRSP pursuant to subsection 4900(12) of the Regulations will cease to be so qualified under the new subsection 4900(13) if amounts received by the RRSP in respect of the share can reasonably be considered to be
1. on account of, in lieu or in satisfaction of, payment for services rendered to the issuer of the share or a person related to the issuer, or
2. in respect of the acquisition of goods from, or the provision of services by, the issuer or a person related to the issuer.
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.
The foregoing comments are not rulings and in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, are not binding on the Department.
We trust the above comments will be of assistance to you.
Financial Industries Division
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1994
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1994