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 and how could LSVCC shares increase the foreign property limit of a trust governed by an RRSP.
Position:
Based on the current wording of the Act and Regulations, it is our opinion that, generally, an otherwise eligible corporation that is described in both sections 6700 and 6701 of the Regulations (for example a RLSVCC) qualifies as an eligible corporation for the purpose of the small business amount definition in subsection 206(1), even if it is a trader or dealer or a money-lender.
Reasons:
Section 5100 of the Regulations defines an "eligible corporation". This definition includes an LSVCC provided it is prescribed under Regulation 6700, but in paragraph (c) excludes a corporation that is a taxpayer described in subsection 39(5). The Department of Finance, in its July 1997 Technical Notes for amendments made to subsection 39(5), has expressed its intention to make a parallel change to paragraph (c) to exclude mutual fund corporations from the application of that paragraph. Based on the Department of Finance's expressed intention as to how this legislation is designed to function, we have chosen to interpret the existing wording of paragraph (c) as referring to subsection 39(5) as a whole, including its preamble, thereby excluding mutual fund corporations from the paragraph (c) exception.
XXXXXXXXXX 983251
P. -A. Sarrazin
Attention: XXXXXXXXXX
December 15, 1998
Dear XXXXXXXXXX:
Re: LSVCC shares - increase of the foreign property limit for RRSP purposes
This is in reply to your letter of December 9, 1998, in which you requested the Department's views on whether shares of a Labour-Sponsored Venture Capital Corporation ("LSVCC") could serve to increase the 20% foreign property limit of a trust governed by a Registered Retirement Savings Plan ("RRSP").
Generally, an investment by a taxpayer in the shares of prescribed labour sponsored venture capital corporations would increase the taxpayer's foreign property limit. We must note, however, that the legislative provisions allowing for this result (explained in detail below) are circuitous and complex and thus no definitive general comments can be provided in this regard. Although the following analysis is technical in nature, we have attempted to summarize our interpretative position in the final paragraph of this letter.
Legislative Analysis
Deferred income plans such as RRSPs (referred to as RRSPs for the balance of this letter), which invest more than 20% of their assets in foreign property are subject to a tax with respect to their foreign assets in excess of the 20% limit. The 20% test is applied to the cost amount of the assets held by the RRSP and the tax is 1% of the excess foreign property in the RRSP at the end of any month. Paragraph 206(2)(c) of the Act, allows a RRSP to increase its foreign property limit by as much as 20% of the cost amount of its property (to a maximum of 40%) where the RRSP has a "small business investment amount". The increase to the foreign property limit is three times the small business investment amount (to a 20% maximum). (For example, a RRSP holding an investment that qualifies as a small business investment amount of 5% of the cost amount of all assets of the RRSP will have a foreign property limit of 35% - the basic 20% amount plus 15% (3 times 5%) in respect of the small business investment amount).
The term "small business investment amount" is defined under subsection 206(1) and, for any month, is computed with reference to the average cost of all "small business property" held at the end of each of the previous three months. The term "small business property" is also defined in subsection 206(1). Property may only qualify as small business property of a taxpayer where the taxpayer is a prescribed person in respect of the property or is the first person to have acquired the property (other than a broker or dealer in securities) and has owned the property continuously since it was so acquired. The term small business property includes a property prescribed to be a "small business security", a term defined under subsection 5100(2) of the Income Tax Regulations ("the Regulations"). By virtue of that definition, a security may only qualify as a small business security of a person if, immediately after its acquisition, the $10,000,000 cost amounts and the $50,000,000 total assets tests provided in paragraphs (e) and (f) of the definition are met. The term small business security includes a share of the capital stock of an "eligible corporation". Under subsection 5100(1), an eligible corporation includes a prescribed venture capital corporation described in section 6700 of the Regulations. Section 6700 of the Regulations includes corporations registered under various provincial or territorial statutes as well as registered labour-sponsored venture capital corporations ("RLSVCC"). As defined in subsection 248(1) of the Act, a RLSVCC is a corporation registered under subsection 204.81(1) of the Act, the registration of which has not been revoked.
If a labour sponsored venture capital corporation is a RLSVCC or is otherwise described in section 6700 of the Regulations, is not controlled by one or more non-resident persons and the various other requirements described above have been met, it would, but for the comments below, be an eligible corporation (an "otherwise eligible corporation"), the cost amount of which would be included when computing the small business investment amount of the RRSP.
An exception to the definition of eligible corporation, found under paragraph (c) of the definition of eligible corporation in subsection 5100(1) of the Regulations ("paragraph (c)"), provides that a corporation that is a taxpayer described in subsection 39(5) of the Act cannot be included as an eligible corporation, notwithstanding that all of the criteria as described above may have been met.
Paragraphs 39(5)(a), (b), (f) and (g) provide descriptions of four taxpayers, including, in paragraph 39(5)(a) a corporation that was a trader or dealer in securities (a "trader or dealer") and in paragraph 39(5)(f) a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof (a "money-lender"). However, the preamble in subsection 39(5), as it reads after June 17, 1998 (and applicable to the 1991 and subsequent taxation years) serves to exclude from its application a taxpayer that is a mutual fund corporation or a mutual fund trust. (Note that the definition of mutual fund corporation in subsection 248(1) refers to the definition provided in subsection 131(8) of the Act, and under that definition a mutual fund corporation includes LSVCCs prescribed under section 6701 of the Regulations. Note that RLSVCCs are also described in section 6701 of the Regulations, in addition to being described in section 6700 of the Regulations).
For the purposes of paragraph (c), it is not evident that the four taxpayers listed in subsection 39(5) should be considered as the taxpayers described in that subsection, or if the preamble -which would exclude mutual fund corporations from the paragraph (c) exception- should also be considered. If the former interpretation is applied, corporations (including RLSVCCs) that are traders or dealers or money-lenders will not qualify for the foreign property limit increase as they would not be eligible corporations.
The Department of Finance, in its July 1997 Technical Notes for amendments made to subsection 39(5), has expressed its intention to make a parallel change to paragraph (c) to exclude mutual fund corporations from the application of that paragraph. Based on the Department of Finance's expressed intention as to how this legislation is designed to function, we have chosen to interpret the existing wording of paragraph (c) as referring to subsection 39(5) as a whole, including its preamble, thereby excluding mutual fund corporations from the paragraph (c) exception.
To conclude, and based on the current wording of the Act and Regulations, it is our opinion that, generally, an otherwise eligible corporation that is described in both sections 6700 and 6701 of the Regulations (for example a RLSVCC) qualifies as an eligible corporation for the purpose of the small business amount definition in subsection 206(1), even if it is a trader or dealer or a money-lender.
We trust that these comments will be of assistance.
Yours truly,
Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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