8 February 1996 External T.I. 9533095 - SBC SHARES ELIGIBLE FOR 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:

Investment in a business corporation as a qualified investment for an RRSP

Position:

Routine reply on 4900(6) and (12) with update for October 31/95 passage of amendments (no discussion of transitional rules with respect to property acquired between Dec. 2/92 and November 29/94).

Reasons: N/A

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Attention: XXXXXXXXXX

February 8, 1996

Dear Sirs:

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

This is in reply to your facsimile of December 19, 1995, in which you asked us several questions concerning the criteria which need to be satisfied for an RRSP to invest in the shares of a corporation.

Your questions appear to relate to a proposed transaction. Confirmation as to the income tax consequences of a proposed transaction can only be obtained in an advance income tax ruling obtained under the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. We can, however, provide you with the following general comments which describe the criteria for qualified investment by an RRSP in shares of a corporation which may or may not be applicable to the circumstances of your particular situation.

A "qualified investment" for an RRSP is a term defined in subsection 146(1) of the Income Tax Act (the "Act"). Generally under paragraph 146(1)(a) of that definition 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 IT-391 for more information on public corporation status).

Where the shares of a corporation are not a "qualified investment" for an RRSP under paragraph 146(1)(a), they may qualify under paragraph 146(1)(d) of that definition if they are prescribed as such by the Income Tax Regulations (the "Regulations"), specifically paragraph 4900(6)(a) or subsection 4900(12) of the Regulations.

Shares of Other Corporations

Paragraph 4900(6)(a) of the Regulations prescribes the shares of an "eligible corporation" to be a qualified investment for RRSP purposes provided the annuitant of the RRSP is not a "designated shareholder" of that company. In general, an "eligible corporation" is defined in subsection 5100(1) of the Regulations as being a taxable Canadian corporation which uses all or substantially all (90% or more) of its property in a "qualifying active business". Excluded from this definition are corporations that are taxpayers described in subsection 39(5) of the Act, and non-resident controlled corporations.

A "qualifying active business" is also a defined in subsection 5100(1) of the Regulations and generally includes any business which is carried on primarily in Canada except where the principal purpose of the business is to earn income from property including interest, dividends, rent and royalties or gains derived from dispositions of property (other than inventory). A qualifying active business may, however, include a business of leasing property other than real property.

A corporation's business for this purpose will be considered to have been carried on primarily in Canada if at least 50% of the full-time employees of the corporation and all corporations related to it and employed in respect of the business are employed in Canada, or at least 50% of the salaries or wages paid to employees of the corporation and all corporations related to it and employed in respect of the business are reasonably attributable to services provided in Canada.

With respect to property acquired by the RRSP after November 29, 1994, a "designated shareholder" of a corporation is defined in subsection 4901(2) of the Regulations as any taxpayer (RRSP annuitant) who at the time

(a) is, or is related to (within the meaning of section 251 of the Act), a "specified shareholder" (defined in subsection 248(1) of the Act - generally a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation and of any corporations related to the corporation), unless the cost amount of all the shares owned or deemed to be owned by the annuitant is in total, less than $25,000.

(b) is or is related to a member of a partnership that controls the corporation;

(c) is or is related to a beneficiary under a trust that controls the corporation;

(d) is or is related to an employee of the corporation (or a related corporation) where any group of employees control the corporation, except where the group of employees that control the corporation (or related corporation) includes a person or a related group of persons that control the corporation (or related corporation); or

(e) does not deal at arm's length with the corporation (see discussion of the meaning of arm's length and related persons in the attached copy of IT-419).

For the purposes of the 10% and $25,000 tests described in (a) above, an annuitant of an RRSP is deemed to own the shares owned by the RRSP trust (see paragraph 248(1)(b) of the definition of "specified shareholder"), and any share that the RRSP annuitant or a related person owns or has a right to acquire (see subsections 4901(2.2) and (2.3) of the Regulations);

The above requirements of being an "eligible corporation" and the "designated shareholder" must be satisfied at the time the RRSP acquires the shares and continually thereafter. Should an RRSP annuitant ever become a "designated shareholder" of the corporation or the corporation fail to be an "eligible corporation" at a later date, the shares will become non-qualified investments for the RRSP.

In accordance with subsection 4900(8) of the Regulations a share of an eligible corporation will also become a non-qualified investment if the RRSP annuitant provides services to or for the issuer of the share or a person related to the issuer and a dividend is received by the RRSP which can reasonably be considered to be payment for the services provided.

Shares of SBCs

Paragraph 4900(12)(a) of the Regulations (applicable after December 2, 1992) was introduced to allow shares of the capital stock of a "small business corporation" ("SBC") to be qualified investments for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the shares.

SBC is defined in subsection 248(1) of the Act. However, for the purpose of determining whether the corporations shares are a qualified investment for an RRSP the expression "Canadian-controlled private corporation" contained in the SBC definition should be replaced with "Canadian corporation". Generally, a SBC is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents and all or substantially all (90% or more) of the fair market value of the corporation's assets are attributable to assets that are:

a)used principally (50% of the time or more) in an active business carried on primarily in Canada by the corporation or by a corporation related to it,

b)shares or indebtedness of other SBCs which are connected with the corporation, or

c)any combination of assets described in (a) and (b) above.

With respect to property acquired by an RRSP after November 29, 1994, "connected shareholder" of a corporation is defined in subsection 4901(2) of the Regulations as being a person who is a "specified shareholder" of the corporation (see discussion of specified shareholder and the 10% test under the heading "Shares of Other Corporations" above), unless that person deals at arm's length with the corporation and the cost amount of all the shares that person owns or is deemed to own is, in total, less than $25,000 (see IT-419).

For purposes of the 10% and $25,000 tests described above subparagraph 248(1)(b) of the Act and section 4901(2.2) of the Regulations will operate to deem a person (ie: annuitant of an RRSP trust) to own the shares owned by the RRSP and any share that the RRSP annuitant or a related person otherwise has a right to acquire.

Unlike the continuous "eligible corporation" and "designated shareholder" requirements discussed under the heading "Shares of Other Corporations" above, subsection 4900(12) of the Regulations only requires a corporation to meet the definition of SBC once, that being either at the time the shares are acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired. Similarly, subsection 4900(12) only requires that the annuitant must not be a "connected shareholder" at the time immediately after the shares are acquired by the RRSP. Accordingly, should the corporation fail to remain a SBC or the annuitant later become a "connected shareholder" the shares will not consequently become non-qualified investments for the RRSP.

However, in accordance with subsection 4900(13) of the Regulations a share of a SBC will become non-qualified if:

(i)an individual provides services to or for, acquires goods from, or is provided services by, the issuer of the share or a person related to the issuer;

(ii)an amount is received by the RRSP in respect of the share; and

(iii)the amount can reasonably be considered to be

(A)on account of or in lieu or in satisfaction of, payment for the services to or for the issuer or the person related to the issuer, or

(B)in respect of the acquisition of the goods from, or services provided by, the issuer or the person related to the issuer.

Due to the detail and complexity of these rules the foregoing comments are meant only to provide a general overview of the relevant provisions and under no circumstances should they be considered either comprehensive or all inclusive and do not bind the Department. We trust, however, that they will be of some assistance to you. Should you wish to make a formal ruling request with respect to your particular situation please follow the procedures outlined in Information Circular 70-6R2 and the Special Release thereto which we have included for your reference.

Yours truly,

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