8 June 1999 External T.I. 9906505 - WRITING OF PUT OPTIONS - RRSP

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 the writing of put options in an RRSP trust is subject to the rules governing qualified investments?

Position:

1. RRSP does not hold a right to acquire property;

2. Property received or provided by the RRSP may be subject to these rules.

Reasons: Wording of the Act.

XXXXXXXXXX 					5-990650
						Fouad Daaboul
Attention:  XXXXXXXXXX 

June 8, 1999

Dear Sirs:

Re: The Writing of Put Options in an RRSP/RRIF ("RRSP")

This is in reply to your letter of March 9, 1999 wherein you requested our comments in respect of the writing of put options in a trust governed by a registered retirement savings plan or registered retirement income fund (hereinafter collectively referred to as the "RRSP").

As indicated in Information Circular 70-6R3, confirmation of the tax consequences flowing from completed transactions must be obtained from your local tax services office. This Directorate will provide a technical interpretation concerning the application of the provisions of the Income Tax Act (the "Act") and Income Tax Regulations (the "Regulations") but not with respect to completed or proposed transactions. We may, however, provide the following general comments concerning the provisions of the Act, in accordance with the above-mentioned Information Circular, which are not binding on the Department.

After 1992, an RRSP can acquire an option that is a qualified investment if the option gives the RRSP the right to acquire property (e.g., a share) that is a qualified investment. Such an option is a warrant or right that qualifies pursuant to paragraph 4900(1)(e) of the Regulations. A trust governed by an RRSP that acquires a put option has acquired a non-qualified investment as a put option involves the right to dispose of property rather than a right to acquire property as described in paragraph 4900(1)(e).

The writing of a put option (the "Option") generally represents an agreement to purchase shares if the person who holds the Option exercises his right to sell within a specified time. Since the RRSP does not acquire a right when it writes the option, the rules concerning the acquisition of property do not apply. Generally, cash will be received by the writer of the put option and any monies received pursuant to the agreement will be a qualified investment provided the money is legal tender in Canada.

If under the terms of the agreement the RRSP is required to leave assets (margin) on deposit with a broker to cover the possible exercise of the Option by its holder to purchase the shares, it is our view that paragraph 146(10)(b) of the Act will apply if the assets represent security for a loan.

You have expressed some concerns of a policy nature regarding the writing of put options within an RRSP. Please note that Revenue Canada does not write or amend legislation; the function of Revenue Canada is to administer and enforce the laws set out in the Act. The concerns raised in your letter relate to tax policy, which is the responsibility of the Department of Finance and, accordingly, they should have been addressed to that Department.

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