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:
Why do we take the position that writing covered call options and purchasing call options are acceptable RRSP activities but not buying put options.
Position TAKEN:
Confirmed positions.
Reasons FOR POSITION TAKEN:
Routine - see 5-0051 for rationale on purchase of put option, 931863, 930894, 900644 re writing covered call options and acquiring call options.
XXXXXXXXXX 942710
Attention: XXXXXXXXXX
October 27, 1994
Dear Sirs:
Re: Options as Qualified Investments
This is in reply to your facsimile transmission of October 20, 1994, in which you ask why we regard the purchase of call options and the writing of covered call options as acceptable activities or investments for a registered retirement savings plan (RRSP), but do not consider the purchase of put options by an RRSP to be acceptable.
The positions concerning the purchase of both a call option and a put option by an RRSP are contained in paragraph 14 of Interpretation Bulletin IT-320R2 ("Registered Retirement Savings Plans - Qualified Investments"). Subsequent to the publication of IT-320R2, the Income Tax Regulations (the "Regulations") were amended so it is no longer necessary, as stated in the IT, that the warrant or right to purchase a qualified investment be listed on a prescribed stock exchange in Canada.
To explain the positions, the purchase of a call option is equivalent to purchasing a right or warrant and, if the subject of the option is a qualified investment, the call option is a qualified investment pursuant to paragraph 4900(1)(e) of the Regulations.
Where the RRSP purchases a put option, it purchases the right to sell securities at an agreed-upon price. This right is a property which is not a qualified investment as defined in subsection 146(1) of the Income Tax Act. Furthermore, where the RRSP does not own the underlying securities, the transaction is speculative; and where the RRSP does own the underlying securities, the additional cost of a put option in order to sell the shares (which could have been sold without incurring such an additional cost) does not appear to be consistent with the intent behind the concept of qualified investments. Given these factors, the RRSP might also be considered to be in the business of trading in put options and subject to taxation in accordance with subsection 146(4) of the Income Tax Act.
Finally, the writing of a covered call option involves the RRSP receiving cash for agreeing to sell in future property which it presently owns at an agreed-upon price. If the holder exercises the option and the RRSP sells at a loss, it is departmental practice not to apply to the annuitant the provisions of subsection 146(9) of the Income Tax Act which deal with dispositions of property by an RRSP at less than fair market value. Whether the option is exercised or not, however, the RRSP acquires only cash when it writes the covered call option; the agreement to sell is not a property and, thus, is not subject to the qualified investment rules.
Although the foregoing comments are not binding on the Department, we trust they explain our position satisfactorily.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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