29 November 1995 External T.I. 9528425 - QUALIFIED INVESTMENTS IN AN 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:

	Whether or not investment in "franchise" offered by 	company would be a qualified investment

Position:

	question of fact - gave general opinion on investments 	by an RRSP

Reasons:

XXXXXXXXXX 5-952842

Attention: XXXXXXXXXX

November 29, 1995

Dear Sirs:

Re: Qualified Investments in a Registered Retirement Savings Plan ("RRSP")

This is in reply to your letter of August 24, 1995, which was forwarded to this Directorate on October 27, 1995, in which you request whether or not certain investments in your company would be qualified investments in an RRSP.

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R2 (copy enclosed). 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, may only 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 a qualified investment at the time of acquisition.

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 following general comments which may or may not be applicable to the circumstances of your particular situation.

Pursuant to paragraph 146(4)(b) of the Income Tax Act (the "Act"), if an RRSP trust carries on a business in the year, it is taxable on the income attributable to that business, except to the extent that the business income is attributable to a qualified investment or to the disposition of qualified investments.

To be a qualified investment for an RRSP, the requirements of subsection 146(1) "qualified investment" of the Act, as extended to paragraph 204(e) of the Act and section 4900 of the Income Tax Regulations (the "Regulations") must be met. As noted in paragraph 3 of Interpretation Bulletin IT-320R2 (copy enclosed) "Some of the common types of investment considered to qualify for the purposes of an RRSP are as follows:

(a) certain bonds, debentures and similar obligations of the Government of Canada, a province, municipality, or Crown corporation or such indebtedness guaranteed by the Government of Canada;

(b) guaranteed investment certificates, issued by a Canadian Trust Company;

(c) shares and debt obligations of corporations listed on a prescribed stock exchange in Canada;

(d) shares listed on a prescribed stock exchange outside Canada;

(e) shares of the capital stock of certain public corporations;

(f) units of a mutual fund trust.

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 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). It should be noted that for purposes of the Act, life insurance corporations are considered to be public corporations.

When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify if they are shares of a Canadian-controlled private corporation (CCPC) which is an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that company. These latter two terms are defined terms and their meanings are provided in sections 4900 through 5103 of the Regulations.

In brief, an "eligible corporation" is generally a taxable Canadian corporation which uses substantially all (90% or more) 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 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.

A "designated shareholder" of a corporation is any RRSP annuitant who

(a)is, or is related to,

(i)a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation),

(ii)a person who would be a "specified shareholder" if he or she were deemed to own all the shares which he or she has a right to acquire under a contract, in equity or otherwise, either immediately or in future and either absolutely or contingently, and one of the main reasons for the existence of the right may reasonably be considered to be that he or she not be regarded as a "specified shareholder",

unless the cost amount of those shares (i.e. the shares owned directly or indirectly by the RRSP annuitant or the related person, and the shares the RRSP annuitant or related person has a right to acquire) is, in total, less than $25,000. 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);

(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.

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 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 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