21 July 1998 External T.I. E9812925 - RRSP FOREIGN PROPERTY CHANGE OF STATUS

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 are the consequences to an RRSP that holds shares of a CCPC that becomes a foreign controlled private corporation?

Position:

1. The shares may become non-qualified as investments.

2. The Part XI excess foreign property tax may apply but this will generally not occur for a two year period.

Reasons:

1. The shares of such a corporation may cease to be qualified investments or may continue to be qualified investments depending on whether they originally qualified under subsection 4900(6) or subsection 4900(12) of the Regulations.

2. The law provides a two year grace period before the excess foreign property tax will apply to any property that becomes a foreign property after it was last acquired by an RRSP. This was designed to allow the plans to dispose of the property over the two year period.

XXXXXXXXXX 		981292
			. C. Harding

Attention: XXXXXXXXXX

July 21, 1998

Dear Sirs:

Re: Change in Nature of Shares held in a
Registered Retirement Savings Plan (an “RRSP”)

This is in reply to your letter of May 12, 1998, in which you requested clarification of the consequences to an RRSP that holds shares a Canadian Controlled Private Corporation (a “CCPC”) if the corporation becomes a foreign controlled private corporation.

Questions concerning actual fact situations must be directed to your local Tax Services Office for reply. Accordingly, since it appears that your questions may relate to a factual situation in which an existing RRSP holds shares of a corporation that has become foreign controlled we cannot provide any specific comments. However, we can provide the following general comments which may be of assistance to you.

In general, shares of a CCPC are qualified investments for an RRSP if:

• the conditions set out in subsection 4900(6) of the Income Tax Regulations (the “Regulations”) are met throughout the period they are held by the RRSP; or
• the shares are acquired after November 29,1994, the conditions set out in subsection 4900(12) are met at the time the shares were acquired and the provisions of subsection 4900(13) of the Regulations do not apply at any time thereafter. (For purposes of this discussion it is presumed that subsection 4900(13) of the Regulations do not apply.)

Accordingly, the status of such shares will depend on how the shares first qualified as investments for the RRSP. In particular:

• if the shares were acquired before November 29, 1994, they will cease to be qualified investments for the RRSP at the time the corporation becomes foreign controlled;
• if the shares were acquired after November 29, 1994, and subsection 4900(12) of the Regulations did not apply, they will cease to be qualified investments for the RRSP at the time the corporation becomes foreign controlled; and
• if the shares were acquired after November 29, 1994, and subsection 4900(12) of the Regulations applied, they will continue to be qualified investments for the RRSP.

In the last case, it should be noted that only the shares held by the RRSP at the time the corporation becomes foreign controlled would continue to be qualified investments for the RRSP under subsection 4900(12) of the Regulations. Any additional shares acquired after the corporation becomes foreign controlled would not qualify under that provision.

When an RRSP holds non-qualified property at the end of any month it will be subject to tax under Part XI.1 of the Act.

Paragraph 7 of the Department’s Interpretation Bulletin IT-412R2 Foreign Property of Registered Plans (enclosed) discusses the consequences where a property held in a registered plan becomes a foreign property after it was last acquired. Briefly, if a property held by an RRSP continues to be a qualified investment for an RRSP but becomes a foreign property, the cost amount of the property will not be included in the calculation of the Part XI taxes on excess foreign property for a period of 24 months in order to allow the plan to dispose of the property. Thereafter the property will be subject to the same rules applicable to any other foreign property.

We would also like to note that while shares of a CCPC may become foreign property when the corporation becomes foreign controlled, this does not necessarily have to occur. In general, unless a provision of the Income Tax Act otherwise specifies, a share of a Canadian corporation may not become a foreign property because it becomes foreign controlled if the residence of the corporation does not change. For further information on this please refer to paragraph 15 of the enclosed Interpretation Bulletin IT-391R Status of Corporations and to the definition of a Canadian corporation found in subsection 89(1) of the Income Tax Act.

We trust this information will be of assistance to you

Yours truly,

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

ENC.