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 RRSP entering into "spread" offends rules.
Position:
Option to acquire qualified investment is a qualified investment and obligation to sell is not subject to qualified investment rules; however, entering into spread may be indicative of business which causes income to be taxable and leaving deposit (margin) with broker may be a non-qualified investment.
Reasons:
The Act discourages RRSPs from carrying on a business or businesses and entering into spreads may be carrying on a business.
XXXXXXXXXX 971066
June 19, 1997
Dear XXXXXXXXXX
Re: Call Spread Strategies for Registered Retirement Savings Plan ("RRSP")
This is in reply to your facsimile transmission of April 21, 1997, in which you ask whether an RRSP trust may simultaneously
(a) buy a call option (entitling the RRSP to purchase an agreed-upon security at a predetermined price on or before a certain date),
and
(b) write a call option (obliging the RRSP trust to sell the specified security which is the subject of the option in (a) above on demand at a fixed price on or before a certain date which is earlier than the date in (a) above).
You refer to the rules in the Income Tax Act (the "Act") governing qualified investments for RRSP trusts.
The purchase of a call option by an RRSP trust is subject to the qualified investment rules under the Act, in particular paragraph 4900(1)(e) of the Income Tax Regulations which provides that a qualified investment includes "a right giving the owner thereof the right to acquire either immediately or in the future property all of which is a qualified investment for the (RRSP) trust".
With respect to the writing of a call option it is the Department's position that this activity is not subject to the rules governing qualified investments because it does not involve the acquisition of property by the RRSP.
Although the rules concerning "qualified investments" may not prohibit a transaction such as you have described, entering into a "spread" by simultaneously writing a naked call option with a higher exercise price against a call option purchased by the RRSP, could be an indication the RRSP is carrying on a business which would cause the RRSP to be subject to taxation under subsection 146(4) of the Act.
Whether an RRSP which closes out a "spread" without acquiring and selling the respective securities is carrying on a business can only be determined by an examination of all the relevant facts.
We would further point out that where the RRSP is required to leave cash on deposit (margin) with a broker to cover the possible exercise of the option by the option holder to purchase the securities from the RRSP, such cash may or may not be a qualified investment. In this regard, it is our view that if the cash is left on deposit with the broker for any length of time the deposit would not be a qualified investment by reason of paragraph (a) of the definition of "qualified investment" in section 204 of the Act. To explain, a deposit of Canadian currency is a qualified investment only if it is a deposit within the meaning assigned by the Canada Deposit Insurance Corporation Act or a deposit with a bank. Subsection 146(10) of the Act requires the annuitant to include in income the fair market value of any non-qualified investment.
Although the foregoing comments are an expression of opinion only and are not binding on the Department, we trust they will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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