21 October 1999 External T.I. 9918255 - CCPC SHARES HELD IN AN 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:

1. Required explanation of rules on holding CCPC shares in an RRSP
2. Required explanation of regulations in respect to employer contributions to an RRSP 	withheld from 	employee wages.

Position:

Provided basic explanations of relevant law

Reasons:

Modified our standard explanatory letter on this topic.

XXXXXXXXXX 991825
W. C. Harding
October 21, 1999

Dear Sir:

Re: Withholding on Employer Contributions to and Qualified
Investments for Registered Retirement Savings Plans ("RRSPs")

This is in reply to your letter of July 5, 1999, in which you requested information in respect to an RRSP holding shares of a private corporation and in respect of an employer's requirement to withhold tax on amounts contributed to an RRSP on behalf of an employee.

I. Shares as qualified investments for an RRSP

We cannot confirm whether specific shares are qualified investments for a an RRSP except in the context of an advance income tax ruling. Furthermore we must note that the determination of whether the shares of a particular corporation are qualified investments is a question of fact that can only be determined on a case by case basis and only after a review of all of the facts at the time of any acquisition of the shares. Therefore, we can only provide an advance income tax ruling on the qualification of any particular shares where the facts can be ascertained before hand.

We can however provide the following overview of the rules respecting RRSP investments in shares of a corporation.

Generally an RRSP can invest in shares of a corporation if the shares are listed on a prescribed stock exchange in Canada or in a country other than Canada, or if the corporation is a "public corporation" as defined in the Income Tax Act (the "Act") - please refer to the current version of IT-391 for a discussion of public corporation status. (Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca). It should be noted that for purposes of the Act, life insurance corporations are considered to be public corporations.

When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify under subsection 4900(6) of the Income Tax Regulations (the "Regulations") if the corporation is an "eligible corporation" or under subsection 4900(12) of the Regulations if the corporation is a "small business corporation". These terms are defined in the Act and Regulations and are discussed in greater detail below. A corporation may frequently satisfy the conditions in subsection 4900(12) but not meet the conditions in subsection 4900(6). However, it is only necessary to satisfy one of the subsections.

A. 4900(6)

Under subsection 4900(6) shares of an eligible corporation, within the meaning assigned by subsection 5100(1) of the Regulations, would be a qualified investment for an RRSP if the annuitant under the RRSP is not a "designated shareholder", within the meaning assigned by subsection 4901(2) of the Regulations.

In brief, an "eligible corporation" is generally a taxable Canadian corporation which uses substantially all (90% or more) of its property in a "qualifying active business". Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt, and corporations controlled by non-residents.

A "qualifying active business" is also a defined term which generally includes a retail or wholesale business and any business which is carried on in Canada except one where the principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property. A corporation's business will be considered to have been carried on in Canada if at least 50% of its employees are engaged in the business in Canada or at least 50% of its salaries or wages are paid for services provided in Canada in respect of the business. If the corporation is part of a group of related corporations, the combined services of their employees and the combined salaries and wages paid must be considered in making this determination.

With respect to property acquired by an RRSP after November 29, 1994, a "designated shareholder" of a corporation is any RRSP annuitant who at the time:

(a) is, or is related to, a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation), unless the cost amount of all the shares is, in total, less than $25,000. For this purpose, an annuitant of an RRSP is deemed to own the shares owned by the RRSP (see definition of "specified shareholder" in paragraph 248(1)(b) of the Act), and any share that the RRSP annuitant or a related person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.3) of the Regulations);

(b) is or is related to a member of a partnership that controls the corporation in any manner;

(c) is or is related to a beneficiary under a trust that controls the corporation in any manner;

(d) is or is related to an employee of the corporation where the employees control the corporation, except where the corporation is controlled by one person or a related group of persons; or

(e) does not deal at arm's length with the corporation.

The conditions respecting both the "eligible corporation" and the "designated shareholder" must be satisfied at the time the RRSP acquires the shares and thereafter. Should the annuitant become a "designated shareholder" of the corporation or the corporation fails to be an "eligible corporation" at a later date, the shares will no longer be qualified investments for the RRSP under subsection 4900(6) of the Regulations.

B. 4900(12)

Subsection 4900(12) of the Regulations (applicable after December 2, 1992) was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant 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. For this purpose, a "small business corporation" is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents. In addition, to qualify as a "small business corporation" all or substantially all (90% or more) of the fair market value of the corporation's assets must be attributable to assets that were:

(a) used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares or indebtedness of other small business corporations which were connected with the particular corporation, or

(c) assets described in (a) and (b) above.

For the purposes of these requirements, an "active business" is, in general, defined as any business carried on by a taxpayer other than a "specified investment business" or a "personal services business". A "specified investment business" is defined as a business the principal purpose of which is to derive income from property including such income as interest, dividends, rent and royalties. Gains from the disposition of real property may or may not be from an active business. Please refer to the current version of IT-73 "The Small Business Deduction" for more information on these topics.

It is important to note that the shares of a CCPC must qualify at the time they are acquired by an RRSP. Shares of a newly formed corporation will not generally qualify prior to the start of an active business.

With respect to property acquired by an RRSP after November 29, 1994, 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 corporations 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 is, in total, less than $25,000.

Note that the conditions respecting the "small business corporation" must be satisfied only at the time the shares are acquired by the RRSP or at the end of the taxation year of the corporation ending before the time the share is acquired. Similarly, the conditions respecting the "connected shareholder" must be satisfied only once, at the time immediately after the shares are acquired by the RRSP.

Should the corporation fail to remain a "small business corporation" or the annuitant become a "connected shareholder" at a later time the shares will not consequently become non-qualified investments for the RRSP. However, in accordance with subsection 4900(13) of the Regulations a share of a "small business corporation" will become non-qualified, 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.

II. Reporting and tax withholding on amounts contributed to an RRSP.

The amount withheld from an employee's wages and contributed to an RRSP by an employer on behalf of the employee is included in the employee's total remuneration reported on a T4 for the year the amount is withheld. However, for the purposes of calculating the amount of tax to be withheld, the employee's remuneration should be reduced by the amount of the contribution. The calculation is the same whether the contribution is paid in respect of a group RRSP or in respect of an individual employee's RRSP. This is explained in greater detail on page 26 of the Department's publication T4001 Employer's Guide to Payroll Deductions- Basic Information 1998-99. The guide is available from your local tax services office or on the Internet at http://www.rc.gc.ca/E/pub/tg/400198et/400198e.txt.html.

We trust these comments will be of assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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