31 January 1995 External T.I. 9432185 - QUALIFIED INVESTMENTS RRSP

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:

General information concerning RRSP investments in shares.

Position TAKEN:

Not Applicable

Reasons FOR POSITION TAKEN:

Routine.

		5-943218
XXXXXXXXXX		L. Roy

Attention: XXXXXXXXXX

January 31, 1995

Dear Sir\Madam:

Re: Qualified Investments for Registered Retirement Savings Plans ("RRSPs")

This is in reply to your letter of November 22, 1994 in which you requested information concerning the requirements for shares to be qualified investments for an RRSP.

Pursuant to the definition of "qualified investment" in subsection 146(1) of the Income Tax Act ("Act"), 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 under the Act. Also a share can qualify as an investment for an RRSP if the conditions under subsection 4900(12) or 4900(6) of the Income Tax Regulations ("Regulations") are met.

Pursuant to subsection 4900(12) of the Regulations, a share of the capital stock of a "small business corporation" is a qualified investment for a trust governed by a 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 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 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.

On November 29, 1994, the Department of Finance published a News Release announcing Draft Amendments to Regulations on qualified RRSP investments. Pursuant to the proposed amendments, a person will not be considered to be a "connected shareholder" of a corporation if the cost of shares in the corporation to that person and related persons is less than $25,000 and the person deals at arm's length with the corporation. The amendment to the connected shareholder's definition will be applicable with respect to property acquired after December 2, 1992.

A share which is qualified for investment pursuant to subsection 4900(12) of the Regulations will cease to be so qualified under 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.

Pursuant to subsection 4900(6) of the Regulations, a property is a qualified investment for a trust governed by a RRSP if at that time, the property is a share of an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that corporation. It should be noted that these conditions must be met at all times while the property is held by the RRSP.

As defined under subsection 5100(1) of the Regulations, an "eligible corporation" is 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 defined under subsection 5100(1) of the Regulations and 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.

As defined under subsection 4901(2) of the Regulations, 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.

Previously, a trust governed by an RRSP was subject to taxation under subsection 207.1(5) of the Act if more than 50% of the fair market value, at the time of acquisition, of its properties were small business properties pursuant to paragraph 4900(6)(a), (b) or (c) of the Regulations. This provision which was imposing a limit on the RRSP's small business properties holdings, was repealed retroactively to the date of its introduction. Therefore, there is no maximum amount of shares that a trust governed by an RRSP can hold as qualified investment without attracting tax.

Subsection 206(2) of the Act applies a tax on a trust governed by a RRSP that hold foreign property in excess of its foreign content limit. Pursuant to subsection 206(2) of the Act, a tax is payable on the cost amount of all foreign property held by an RRSP to the extent the cost amount of its foreign property exceeds the RRSP's foreign property limit in a month. The foreign property limit is generally 20% of the cost amount of all property held but can be increased if the RRSP held properties that are "small business property" as defined in the Act.

For the purpose of subsection 206(2) of the Act, a share held by a trust governed by an RRSP will be a small business property if it is acquired after October 31, 1985 and is a "small business security". In addition, the RRSP must be the first person (except a broker or dealer) to have acquired the share.

"Small business security" is defined in subsection 5100(2) of the Regulations as a property that is a share of the capital stock of an eligible corporation (as previously defined) and certain debt obligations and options of an eligible corporation. Two size tests must be met in this regard. The total investment in shares, debts and options of the eligible corporation by the RRSP must not exceed $10,000,000 and the total assets of the eligible corporation and all associated corporations must not exceed $50,000,000.

Due to the 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.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch