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:
1. is a stock index futures contract a prescribed investment for a registered investment
2. what is cost of contract
3. is acquisition of it considered investing of funds.
Position TAKEN:
1. no
2. brokerage fees plus other costs of acquisition
3. yes
Reasons FOR POSITION TAKEN:
Taken previously
October 27, 1994
Head Office Head Office
Registered Plans Division Rulings Directorate
Richard Rainville D. Duff
Chief of Audit (613) 957-8953
Attention: Norman Pettifer
7-942158
Registered Investment investing in a Stock Index Futures Contract
XXXXXXXXXX
This is in response to your memorandum of August 22, 1994, requesting our opinion on the consequences of a registered investment ("RI"), the XXXXXXXXXX, investing in a Stock Index Futures Contract. We apologize for the delay in responding.
The Fund is a trust that has been accepted for registration as an RI pursuant to subsection 204.4(1) of the Act. We have not been informed under which deferred income plan it was accepted for registration, however, for the purposes of this request it does not matter. You have informed us that the Fund met the requirements for acceptance for registration under paragraph 204.4(2)(d), which is known as a quasi mutual fund.
The provisions of paragraph 204.4(2)(d) apply to trusts that would be a mutual fund trust if paragraph 132(6)(c) was not applicable and that hold only prescribed investments for the type of fund or plan for which it was registered. Paragraphs 132(6)(a) and (b) require, respectively, that the trust be a unit trust resident in Canada and its only undertaking was the investing of funds.
We would also like to point out that pursuant to subsection 204.4(7), where, at the end of any month an RI could qualify under both paragraphs 204.4(2)(c) and (d), it is deemed to have qualified under paragraph 204.4(2)(c), regardless of the fact that it was already accepted for registration under paragraph 204.4(2)(d). For such an RI there is no tax payable pursuant to section 204.6.
A prescribed investment for such an RI is defined in Regulation 4901(1) as a qualified investment for the plan described in paragraphs 204.4(1)(a), (c) or (d) for which the RI was registered. These are, respectively, an RRSP, an RRIF and a DPSP, and as indicated above, we do not know for which the Fund was accepted for registration, however, it does not matter since a Stock Index Futures Contract is not a qualified investment for any of them. Consequently, the Fund has acquired an investment that is not a prescribed investment, and is subject to a Part X.2 tax, pursuant to subsection 204.6(1), equal to 1% of the fair market value of the property at the time of its acquisition.
It has been our position that the cost amount of a Stock Index Futures Contract is the brokerage fees and other costs incidental to the acquisition of the contract. Fair market value is defined in Information Circular 89-3 basically as the highest price obtainable between parties dealing at arm's length. Although we do not normally express opinions on fair market value, it normally would be our position that the cost amount is the fair market value at acquisition when the parties are dealing at arm's length. Therefore, the Part X.2 tax would be based on the brokerage fees and other costs incidental to the acquisition of the Stock Index Futures Contract, which may result in a relatively small amount.
Although you did not request it, we also examined the issue of whether the acquisition of a Stock Index Futures Contract constituted the investing of funds as required by paragraph 132(6)(b) for mutual funds, and it is our position that it does constitute such activity.
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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