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:
"Connected shareholder" and "small business corporation" rules for RSP investment.
Position TAKEN:
General comments.
Reasons FOR POSITION TAKEN:
Routine.
XXXXXXXXXX 951750
Attention: XXXXXXXXXX
September 20, 1995
Dear Sirs:
Re: Qualified Investment in a Registered Retirement Savings Plan
This is in reply to your letter of June 27, 1995, to the Vancouver Tax Services Office which has been forwarded to us for reply. You asked for a technical interpretation concerning subsection 4900(12) of the Income Tax Regulations (the "Regulations") as it applies to a hypothetical situation.
Written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2. (A copy is available from your local tax services office). While you may, if you so desire, request an advance ruling, please note that the eligibility of shares of a corporation as qualified investments for an RRSP is a question of fact which, generally, must be determined at the time of their acquisition by an RRSP or at the relevant time as set out in the Income Tax Act. Accordingly, a ruling can only be provided beforehand if it can be shown that the shares will be qualified at the time of acquisition or the particular relevant time.
While we are unable to provide you with written confirmation regarding the situation described in your letter at this time, we are able to provide you with the following general comments which may or may not be applicable to the circumstances of your particular situation.
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") - see the current version of Interpretation Bulletin IT-391 for more information on public corporation status. (A copy is available from your local tax services office).
Subsection 4900(12) of the Income Tax Regulations (applicable after December 2, 1992) was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share. The corporation must be a "small business corporation" at the time the share is acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired. For this purpose, a "small business corporation" is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents. In addition, to qualify as a "small business corporation" all or substantially all (90% or more) 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.
A "connected shareholder" of a corporation is a "specified shareholder" as defined in subsection 248(1) of the Act - generally, this means a person who owns, or who is a member of a related group which owns, directly or indirectly, 10% or more of the issued shares of any class of the corporation. For this purpose, an annuitant of an RRSP is deemed to own the shares owned by the RRSP (see definition of "specified shareholder" in paragraph 248(1)(b) of the Act). A "connected shareholder" also includes a person who would be a "specified shareholder" if each person or partnership which has an option to acquire a share owned the share.
On November 29, 1994, the Department of Finance issued a News Release announcing draft amendments to the Income Tax Regulations on qualified investments for RRSP's. Pursuant to an amendment to the definition of "connected shareholder", a person who is a "specified shareholder" of a corporation will be a "connected shareholder" of the corporation unless 1) the person deals at arm's length with the corporation and 2) the cost of that person's shares (including shares the person is deemed to own for the purposes of the definition "specified shareholder" in subsection 248(1) of the Act) of the corporation or a corporation related to it is less than $25,000. This amendment will be applicable with respect to property acquired after December 2, 1992.
Due to the detail and complexity of the Income Tax Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances should they be considered either comprehensive or all inclusive.
The above comments are an expression of opinion only and do not bind the Department. We trust, however, that they will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
c.c.D.J. Laporte
Vancouver Tax Services Office
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