31 December 1998 External T.I. 9830615 - SELF DIRECTED RRSP - REG 4900(12)

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 a share of a corporation is a qualified investment by virtue of Regulation 4900(12)?

Position: We do not know. General information provided.

Reasons: Question of fact.

XXXXXXXXXX 			5-983061
				Fouad Daaboul
December 31, 1998

Dear Sir:

Re: Self directed RRSP and RRIF - Regulation 4900(12)

This is in reply to your letter of November 23, 1998, wherein you requested an advance income tax ruling.

In your letter you outline a number of possible scenarios. Please note that advance income tax rulings are only provided in respect of specific transactions seriously contemplated and which are not of a hypothetical nature. Requests for rulings are not considered by Revenue Canada where the request contains alternative courses of action and assumptions. The procedures to be followed when requesting a ruling are outlined in the Information Circular 70-6R3. We may provide, however, the following comments which are general in nature and may be relevant to your situation but which are not binding on the Department.

Subsection 4900(12) of the Regulations was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for a trust governed by a registered plan, such as a registered retirement savings plan ("RRSP") or a registered retirement income fund ("RRIF"), provided that the annuitant under the RRSP or RRIF is not a "connected shareholder" of the corporation immediately after the acquisition of the share. The corporation must be a "small business corporation" at the time the share is acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired.

It is important to note that the shares of a small business corporation must qualify at (or before) the time they are acquired by a RRSP. Shares of a newly formed corporation would not generally qualify prior to the start of an active business.

With respect to such property acquired by a RRSP, a "connected shareholder" of a corporation is generally a person who directly or indirectly owns 10% or more of the shares of any class of shares of the corporation or of any corporation 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. However, an annuitant will not be a "connected shareholder" if he or she deals at arm's length with the corporation and the cost amount of all the shares that the person owns (or is deemed to own) is, in total, less than $25,000.

Paragraph 251(1)(a) of the Act deems that related persons do not deal with each other at arm's length. Under paragraph 251(2)(a), individuals connected by blood relationship, marriage, or adoption are related persons. Paragraph 8 of Interpretation Bulletin IT- 419R states that an individual's niece is not related by blood, marriage, or adoption to the individual unless he or she is also the individual's child or parent because of the extended meaning of child. However, paragraph 251(1)(b) of the Act provides that, at a particular time, it is a question of fact whether unrelated persons are dealing with each other at arm's length.

We must also note that under subsection 4900(13) of the Regulations a share of a "small business corporation" will become a non-qualified investment 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.

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