19 August 1996 External T.I. 9624805 - 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 small corporations.

Position:

Comments on paragraphs 4900(6) and 4900(12) of the Regulations.

Reasons: N/A

									5-962480
XXXXXXXXXX							L. Roy

Attention: XXXXXXXXXX

August 19, 1996

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

This is further to our telephone conversation (XXXXXXXXXX/Roy) of August 13, 1996 in which you requested written information concerning the requirements for shares to be qualified investments for an RRSP.

Pursuant to the definition of "qualified investment" in subsection 146(1) of the Income Tax Act ("Act"), a share of a corporation is a qualified investment if the share is 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 under the Act. Also a share can qualify as an investment for an RRSP if the conditions under subsection 4900(12) or 4900(6) of the Income Tax Regulations ("Regulations") are met.

Pursuant to subsection 4900(12) of the Regulations, a share of the capital stock of a corporation that is 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, 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. In addition, to qualify as a "small business corporation", all or substantially all 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.

With respect to property acquired by an RRSP after November 29, 1994, a "connected shareholder" of a corporation is a "specified shareholder" as defined in subsection 248(1) of the Act. Generally, a "specified shareholder" is a person who individually or with other persons with whom he does not deal at arm's length, owns, directly or indirectly 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation. However, an annuitant who is a "specified shareholder" of the corporation will not be a "connected shareholder" if he or she deals at arm's length with the corporation and the cost amount of all the shares 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) and any share that the RRSP annuitant or a related person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.2) of the Regulations).

Note that the conditions respecting the "small business corporation" must be satisfied only once, that being 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, the conditions respecting the "connected shareholder" must be satisfied only once, that being at the time immediately after the shares are acquired by the RRSP. Should the corporation fail to remain a "small business corporation" or the annuitant become a "connected shareholder" at a later time 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 "small business corporation" 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.

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

For the purpose of the definition of qualifying active 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.

With respect to property acquired by the RRSP after November 29, 1994, a "designated shareholder" of a corporation is any person who:

(a) is, or is related to, a "specified shareholder" (generally, a person who individually or with other person with whom he does not deal at arm's length, owns directly or indirectly 10% or more of the shares of any class of the capital stock of the corporation or of any corporations related to the corporation), unless the cost amount of all the shares 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) and any share that the RRSP annuitant or a related person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.3) of the Regulations);

(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.

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
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch