28 May 1998 External T.I. 9804635 - ALLOWABLE USE OF OPTIONS IN RRP

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 ‚mis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Are the following options qualified investment for purposes of RRSP or RRIF?

Equity Spread;
Index Options;
Put Options;
Covered Call Options;
Call Options;

Position:

Not applicable;
No;
No: cash received on writing a put option may be qualified;
Yes: cash received on writing a call option may be qualified;
Yes;

Reasons:

Spread is a strategy, not an investment;
Do not always give right to cash and as such do not meet the definition;

A Put is not a right to acquire property. Cash qualifies;

Cash qualifies;

Qualifies if listed and underlying property is qualified.

XXXXXXXXXX				5-980463
					Fouad Daaboul
Attention: XXXXXXXXXX 

May 28, 1998

Dear Sirs:

Re: Allowable use of Options in an Registered Retirement Plan

This is in reply to your letter of February 17, 1998 wherein you requested our comments as to whether the following options held in a trust governed by a registered retirement savings plan ( RRSP ) or registered retirement income funds ( RRIF ) are considered to be qualified investments.

Equity Spread

It is our understanding that a spread is a type of transaction whereby the risk associated by the purchase or sale of one investment is reduced through the offsetting purchase or sale of another investment. As such a spread is not of itself an investment but is an investment strategy. The investments composing the spread are in fact the properties of the RRSP trust that may be subject to the qualified investment rules for RRSPs.

Index Options

We understand that the value of an index option is tied to an exchange index. The option may give the holder the right to cash on exercise but not the right to the underlying shares on which its value is based. It is our opinion that index options would not be qualified investments for an RRSP except in respect of the particular time, if any, when it can be clearly established that cash will be realized if the options are exercised at that time.

Put Options

As stated in paragraph 14 of IT-320R2, an RRSP that acquires a put option has acquired a non-qualified investment. This is based on the understanding that the put option involves the right to dispose of the underlying property rather than a right to acquire property as required under paragraph 4900(1)(e) of the Income Tax Regulations (the Regulations ).

The writing of a put option represents an agreement to purchase shares if the person who holds the option exercises his right to sell within a specified time. The RRSP does not acquire a right in this case. Instead, cash is received as a means of possibly reducing the cost of acquiring shares. The writing of put options is not subject to the rules governing qualified investments.

Call Options

An RRSP can acquire a call option that is a qualified investment if the option is listed on a prescribed stock exchange in Canada and gives the RRSP the right to acquire property (e.g., a share) that is a qualified investment. As indicated in paragraph 14 of Interpretation Bulletin IT-320R2, such an option is a warrant or right that qualifies pursuant to paragraph 4900(1)(e) of the Regulations.

The writing of covered call options (that is, selling a call option on property owned by the trust) is not subject to the rules governing qualified investments because it does not involve the acquisition of property by the RRSP. Instead, cash is received as a means of possibly increasing the proceeds from the sale of shares, bonds, warrants or Canadian dollars.

We trust our comments will be of assistance to you.

Yours truly,

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