10 August 1998 External T.I. 9815215 - PUT AND CALL OPTIONS QUALIFIED INVESTMENTS

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:

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

1. Equity Spread;
2. Put Options;
3. Call options acquired in the Market
4. Writing Covered Call Options;

Position:

1. Provisions of the Act do not apply directly to a trading strategy but apply to the underlying properties;
2. No: but cash received on writing a put option may be qualified;
3. Yes if the options are rights to acquire qualified investments;

4. The provisions of the Act do not apply but the cash received on writing a call option may be qualified.

Reasons:

1. A Spread is a strategy, not an investment;

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

3. Qualifies if listed and underlying property is qualified.

4. any Cash is a property so rules apply

XXXXXXXXXX 							5-981521
W. C. Harding

Attention: XXXXXXXXXX 

August 10, 1998

Dear Sirs:

Re: Allowable use of Options in a Registered Retirement Savings Plan

This is in reply to your facsimile of June 10, 1998, wherein you requested our comments as to whether the following options are qualified investments for a trust governed by a registered retirement savings plan (an “RRSP”).

Equity Spread

It is our understanding that a spread is a type of transaction whereby the risk associated with 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.

Put Options

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

On the other hand, 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 when it writes the option so the rules concerning the acquisition of property do not apply. However, any money received as a means of possibly reducing the cost of acquiring the shares will be qualified property to the RRSP provided the money is legal tender in Canada.

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, money 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