10 March 1995 External T.I. 9502565 - QUALIFIED INVESTMENT - 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 of CCPC.

Position TAKEN:

Not Applicable

Reasons FOR POSITION TAKEN:

Routine.

		5-950256
XXXXXXXXXX	L. Roy

Attention: XXXXXXXXXX

March 10, 1995

Dear Sirs:

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

This is in reply to your facsimile of January 27, 1995 in which you requested an advance income tax ruling on whether a husband and a wife who control a Canadian Controlled Private Corporation ("CCPC") can invest in shares or debt of the corporation in their 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. Nevertheless, we offer you the following general comments which may not be applicable to the circumstances of your particular situation.

Shares of a CCPC may qualify as investments for an RRSP if the conditions under subsection 4900(6) or 4900(12) of the Income Tax Regulations ("Regulations") are met.

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.

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.

With respect to e) above, paragraph 251(2)(b) of the Income Tax Act defines when corporations and persons are related and thus defines those who are deemed by subsection 251(1) of the Act not to be dealing at arm's length. It is our view that where a husband and wife control a corporation, they are both related to the corporation and consequently are not dealing at arms's length with the corporation.

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.

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.

Because of the definition of "designated shareholder" and "connected shareholder", a husband and wife not dealing at arms length with a corporation could not invest in shares of the corporation in their RRSP.

Also, concerning debts of the corporation, the RRSP of the husband and the wife could not invest in debt instruments of the corporation.

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