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: What options are qualified investments within the meaning assigned by subsection 146(1) of the Act?
Position: Only if 4900(1)(e) is satisfied.
Reasons: An option to acquire a property will be a qualified investment if the property itself is a qualified investment.
XXXXXXXXXX
982384
Attention: XXXXXXXXXX M.P. Sarazin
January 7, 1999
Dear Sirs:
Re: Qualified Investments and Options
This is in reply to your facsimile dated September 10, 1998, wherein you requested our views as to whether Index options and Equity Options would be qualified investments within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act").
The Department's general views as to which properties are qualified investments for registered retirement savings plans ("RRSP") are found in the enclosed Interpretation Bulletin IT-320R2. Paragraph 14 of IT-320R2 states:
"In accordance with paragraph 4900(1)(e) of the Regulations, a warrant or right listed on a prescribed stock exchange in Canada or, after February 24, 1985, on the Toronto Futures Exchange, giving its owner the right to acquire property, is a qualified investment at the time of its acquisition if, at that time, the property which would be acquired by exercising the warrant or right would be a qualified investment for an RRSP."
After 1992, the warrant or right does not have to trade on a prescribed stock exchange in Canada or on the Toronto Futures Exchange to be a qualified investment.
In order to determine whether any warrant or right would be a qualified investment at any time, we have to look at whether or not the right or warrant provides the holder with the right to acquire property that would be a qualified investment. However, we can provide you with the following comments which have been provided in respect of the different investments listed in your facsimile.
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
ENCLOSURE
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