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.Are call options qualified investments?
2.Is the selling/ writing of call options by an RRSP permitted?
3.Are put options qualified investments?
4.Are index options qualified investments?
Position TAKEN:
1.Yes, if gives RRSP right to acquire property that is qualified investment.
2.Not under option rules - cash received for covered write may be qualified. Writing of naked call option may be subject to 146(4)(b), 146(4)(a) and RRSP would be taxable. Deposit with broker may also be non-qualified.
3.No (although cash received on writing a put option may be qualified).
4.No. RRSP doesn't have right to acquire property.
Reasons FOR POSITION TAKEN:
1.Reg 4900(1)(e)
2. and 3.Legislation and previous letters (E9308945 and E9318635)
4.See E9217811, E9420195)
XXXXXXXXXX 943068
Attention: XXXXXXXXXX
January 30, 1995
Dear Sirs:
This is in reply to your facsimile transmission dated November 28, 1994 in respect of the types of derivatives that can be included as "qualified investments" in a trust governed by a Registered Retirement Savings Plan ("RRSP"). We regret that other workload prevented an earlier reply.
Acquisition of Call Options
An RRSP that acquires a call option has acquired a qualified investment if the option gives the RRSP the right to acquire property that is a qualified investment. Such an option is a "warrant or right" that qualifies pursuant to paragraph 4900(1)(e) of the Income Tax Regulations. The former additional requirement that the "warrant or right" (that is, the call option) must be listed on a prescribed stock exchange in Canada was removed from the legislation in 1994, effective after 1992.
Generally, a share of a corporation is a qualified investment if the share is 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 (the "Act"). Accordingly, the acquisition of a call option on such a share would be a qualified investment.
Bonds, debentures, notes, mortgages, or similar obligations of or guaranteed by the Government of Canada are also qualified investments.
Writing of Covered Call Options
The writing of covered call options is not subject to the above rules for options since the RRSP is not acquiring an option that gives it the right to acquire property. Instead, cash is received by the RRSP from the holder of the covered call option. Cash is a qualified investment if it is money that is legal tender in Canada.
Where an RRSP has the underlying qualifying investment and the holder of the covered call option has in fact exercised his or her right to purchase under the option, it is Departmental practice not to apply to the annuitant of the RRSP the provisions of subsection 146(9) of the Act. Subsection 146(9) concerns dispositions of property by an RRSP for less than fair market value and would otherwise apply to include any excess of fair market value over the consideration received in the income of the annuitant.
Writing of Naked Call Options
In general, we consider the writing of naked call options as being speculative in nature and inconsistent with the intent behind the concept of qualified investments for RRSPs. Consequently, an RRSP engaged in this activity could be considered to be carrying on a business, thus resulting in the application of paragraph 146(4)(b) of the Act and the taxation of the RRSP on its taxable income for the year.
We understand that in the case of a naked call option, the RRSP contracts an obligation to sell an investment that it does not have at the time of writing the option. It is reasonable in our view to assume that funds will be available in the RRSP to purchase those investments in order to cover the possible exercise of the option by the option holder. If the RRSP does not have sufficient funds for such purpose and instead borrows funds or draws on an established line of credit, paragraph 146(4)(a) of the Act may also apply to tax the RRSP on its taxable income for the year.
In addition, where an RRSP is required to leave cash on deposit (margin) with a broker to cover the possible exercise of the option by the option holder to purchase the shares from the RRSP, such cash may or may not be a qualified investment. It is our view that if the cash is left on deposit with the broker for any length of time, the deposit would not be a qualified investment by reason of subparagraph 204(e)(i) of the definition of qualified investment. As a result, subsection 146(10) of the Act would include the fair market value of the deposit in the income of the annuitant of the RRSP. If, however, the cash (margin) is deposited with the broker and the transaction will be concluded within a few days, it is our view that subsection 146(10) of the Act would not be applied to the annuitant.
Put Options
An RRSP that acquires a put option has acquired a non-qualified investment, since the put option does not give the RRSP the "right to acquire property" but rather a right to dispose of the underlying property.
The writing of a put option represents an agreement to purchase shares if the person who holds the option exercises his right to sell within a specified time. Again the RRSP does not have the "right to acquire property"; however, the cash received will be a qualified investment if it is legal tender in Canada.
Where an RRSP is required to leave cash (margin) on deposit with the broker to cover the possible exercise of a put by the holder, such cash may or may not be a qualified investment, as discussed above.
Index Options
We understand that the value of an index option is tied to an exchange index. The option may give the holder the right to cash on exercise but not the right to the underlying shares on which its value is based. It is our opinion that index options would not be qualified investments for an RRSP except in respect of the particular time, if any, when it can be clearly established that cash will be realized if the options are exercised at that time. However, at the time of purchase the holder is not entitled to the right to acquire any property.
You have also inquired about the eligibility of "mutual funds known as commodity pools". We are not familiar with this term and would require more information for a response.
We trust our comments are of assistance.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy & Legislation Branch
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