26 March 1998 External T.I. 9732845 - RRSP SHARES OF COOPERATIVE CORPORATION

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: Shares of a cooperative as a qualified investment in a RRSP.

Position: May be possible.

Reasons: Must adhere to subsection 4900(12) of the Regulations.

XXXXXXXXXX 	                    			973284
F. S. Gillman, LL.L., C.A.
Attention:  XXXXXXXXXX  

March 26, 1998

Dear Sirs:

Re: Qualified Investments

This is in response to your letter dated December 11, 1997, wherein you requested whether shares of XXXXXXXXXX would be qualified investments for a registered retirement savings plan ("RRSP").

The situation described in your letter appears to be an actual fact situation relating to an existing arrangement. Confirmation of the tax implications inherent in an arrangement is given by this Directorate only where the arrangement is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3 (copy enclosed). As stated at paragraph 7 of the circular, an advanced income tax ruling will not be issued where the arrangement is sufficiently advanced, in which case the enquiry should be forwarded to the relevant Tax Services Office. We offer, however, the following general comments.

A qualified investment for an RRSP is defined in paragraph 146(1) of the Income Tax Act (the "Act"). Subsection 4900(12) of the Income Tax Regulations (the "Regulations") expands this definition to include a qualifying share in respect of a specified cooperative corporation, where immediately after the time the share was acquired by the RRSP trust, the annuitant of the RRSP trust at that time was not a connected shareholder of the corporation.

For this purpose a specified cooperative corporation is defined at subsection 4901(2) of the Regulations to mean:

"a) a cooperative corporation within the meaning assigned by subsection 136(2) of the Act, or

b) a corporation that would be a cooperative corporation within the meaning assigned by subsection 136(2) of the Act if the purpose described in that subsection were the purpose of providing employment to the corporation's members or customers."

Subsection 136(2) of the Act defines a cooperative corporation as being:

"a corporation that was incorporated by or under a law of Canada or a province providing for the establishment of the corporation or respecting the establishment of cooperative corporations for the purpose of marketing (including processing incident to or connected therewith) natural products belonging to or acquired from its members or customers, of purchasing supplies, equipment or household necessaries for or to be sold to its members or customers or of performing services for its members or customers, if

(a) the statute by or under which it was incorporated, its charter, articles of association or by-laws or its contracts with its members or its members and customers held out the prospect that payments would be made to them in proportion to patronage;

(b) none of its members (except other cooperative corporations) have more than one vote in the conduct of the affairs of the corporation; and

(c) at least 90% of its members are individuals, other cooperative corporations, or corporations or partnerships that carry on the business of farming, and at least 90% of its shares, if any, are held by those persons or partnerships."

However, under 4900(13) of the Regulations where a share is a qualified investment solely because of subsection 4900(12) of the Regulations, it will become a non-qualified investment for an RRSP, 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.

A "connected shareholder" of a corporation is defined at subsection 4901(2) of the Regulations as a person who owns directly or indirectly at that time 10% or more of the issued shares of any class of shares of the corporation or of any corporations related to the corporation. Furthermore, through the application of paragraphs (a) to (e) of the definition of "specified shareholder" in subsection 248(1) of the Act and the application of subsection 4901(2.2) of the Regulations, an annuitant of an RRSP will be considered to own all of the shares owned by the RRSP or any person not dealing at arm's length with the annuitant, a proportion of any shares owned by certain trusts and partnerships and any share that the RRSP annuitant or a related person has a right to acquire. The definition goes on to exempt, a person from the above definition if the total 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.

To summarize (in general terms), a share of XXXXXXXXXX may be a qualified investment for an RRSP if the corporation qualifies as a “cooperative corporation” (as defined in subsection 136(2) of the Act), if the owner of the shares is not a connected shareholder to the corporation (generally met if the shareholder owns less than 10% of the issued shares of any class of the corporation), and subsection 4900(13) of the Regulations does not apply (i.e. in policy terms, the return on the shares is a return on investment and not a payment for goods and/or services to the corporation).

These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. As stated in paragraph 22 of Information Circular 70-6R3, written opinions are not advance rulings and, accordingly, are not binding on the Department.

We trust these comments will be of assistance.

Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
- 3 -

.../cont'd