4 July 1995 External T.I. 9512015 - RRSP INVESTMENTS IN DEBT AND SHARES

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 on RRSP investments in

shares and debt.

Position TAKEN: Not Applicable

Reasons FOR POSITION: Routine.

XXXXXXXXXX							5-951201

July 4, 1995

Dear XXXXXXXXXX:

Re: Qualified Investments for Registered Retirement Savings Plans

This is in reply to your letter of April 20, 1995, in which you requested guidelines with respect to a Registered Retirement Savings Plan (an RRSP) investing in a corporation.

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, available from your local Tax Services Office. However, we can provide you with the following general comments which may not be applicable to the circumstances of your particular situation.

Shares of a Corporation

Generally an RRSP can invest in shares of a corporation if the shares are 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").

If the shares of a corporation do not qualify as noted above, they may still qualify if they are shares of a Canadian Controlled Private Corporation (a "CCPC") and the conditions under either subsection 4900(6) or 4900(12) of the Income Tax Regulations (the "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 the time of acquisition and at all times while held by an RRSP, the property is a share of an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that corporation. 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.

A "qualifying active business" is also a defined term which generally includes any business which is carried on in Canada except one where the principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property, and a retail or wholesale 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.

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 an RRSP, provided 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.

Debt of a Corporation

Generally speaking, a debt owing by a corporation to a trust governed by an RRSP would represent a qualified investment of the trust only if the debt is:

(a)a bond, debenture, note, or similar obligation of a corporation the shares of which are listed on a prescribed stock exchange in Canada;

(b)a bond, debenture, note, mortgage, hypothec or similar obligation of a Canadian corporation which is controlled directly or indirectly by one or more corporations or mutual fund trusts whose shares or units are listed on a prescribed stock exchange in Canada;

(c)a bond, debenture, note, mortgage, hypothec or similar obligation of a Canadian corporation which is guaranteed by a corporation or a mutual fund trust whose shares or units are listed on a prescribed stock exchange in Canada;

(d)a bond, debenture, note or similar obligation of a Canadian corporation where the conditions described in subparagraph 4900(1)(i)(iii) of the Regulations are met which, in part and in general terms, require the corporation to have share equity of at least twenty five million dollars or be controlled by such a corporation and have issued and outstanding debt of at least ten million dollars;

(e)a bond, debenture, note, mortgage, or similar obligation that is:

(i)a bond of or guaranteed by Government of Canada issued on or before December 20, 1960,

(ii)bonds of or guaranteed by the Government of Canada issued after December 20, 1960, and before April 16, 1966, the interest on which is payable to another country or to a Regulation 806 or 806.1 international organization or agency, or

(iii)bonds, debentures, notes mortgages, or similar obligations

-of or guaranteed by the Government of Canada,

-of the government of a province or an agent thereof,

-of a Canadian municipality or municipal or public body performing a function of government in Canada,

-of a body 90% or more of which is owned by a province or Canadian municipality or of a wholly-owned subsidiary of such a body, or

-of an educational institution or hospital if repayment of principal and payment of interest is to be made, or is guaranteed, assured, or otherwise specifically provided for or secured, by a province.

(f)a bond, debenture, note or similar obligation of a public corporation (other than a mortgage investment corporation);

(g) a bond, debenture, note or similar obligation of a corporation the shares of which are listed on a prescribed stock exchange outside of Canada;

(f)a security of a Canadian corporation

(i)that was issued pursuant to The Community Bonds Act S.S. 90, c. C-16.1, The Rural Development Bonds Act S.M. 91-92, c. 47, the Community Economic Development Act 1993 S.O. 93, c. 26, or the New Brunswick Community Development Bond Program through which financial assistance is provided under the Economic Development Act N.B. 75, c. E-1.11, and

(ii)the payment of the principal amount of which is guaranteed by Her Majesty in Right of a province; and

(g)indebtedness of a Canadian corporation (other than a corporation that does not deal at arm's length with a person who is an annuitant under the RRSP trust) represented by a bankers' acceptance.

There are other provisions which also allow RRSPs to hold debt of Canadian corporations. However, these are directed to particular types of corporations such as credit unions or cooperative corporations.

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. They 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. You should also note that while a request for an advance ruling may be made with respect to the eligibility of shares and debts of a corporation as qualified investments for an RRSP, the eligibility of such properties is a question of fact which, generally, may only be determined at the time of their acquisition by an RRSP. Accordingly, a ruling can only be provided beforehand if it can be shown that the shares will be qualified at the time of acquisition.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch