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.
Principal Issues: Where Person A directs his RRSP to acquire shares of a corporation wholly-owned by Person B and Person B similarly directs his RRSP to acquire shares of a corporation wholly-owned by Person A, would the shares held in their respective RRSPs be qualified investments?
Position: Provided general comments.
Reasons: The conditions set out in subsection 4900(12) of the Regulations must be met. It is a factual determination whether the corporations are specified small business corporations and whether Person A and Person B are connected shareholders.
XXXXXXXXXX 2009-034798
April 29, 2010
Dear XXXXXXXXXX :
Re: Qualified Investments for RRSPs
We are writing in response to your email of November 11, 2009, wherein you requested our views on whether shares of a corporation would constitute a qualified investment for registered retirement savings plan ("RRSP") purposes in the circumstances described below.
Person A directs his RRSP to acquire shares in Corporation B, a corporation wholly-owned by Person B. Person B similarly directs his RRSP to acquire shares in Corporation A, a corporation wholly-owned by Person A. You note that both Corporation A and Corporation B are small business corporations and that Person A and Person B deal at arm's length with each other. Subsequent to the share acquisitions, Person A's RRSP will own less than 10% of the issued shares of Corporation B and Person B's RRSP will own less than 10% of the issued shares of Corporation A.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance.
Our Comments
Interpretation Bulletin IT-320R3, Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds, discusses the situations where shares of corporations will be qualified investments for trusts governed by registered plans. In this respect, paragraph 6 of IT-320R3 states that shares of small business corporations may be qualified investments for a trust governed by an RRSP where the conditions described in paragraph 4900(12)(a) of the Income Tax Regulations (the "Regulations") are satisfied. We note that paragraph 4900(12)(a) of the Regulations has been amended, effective for the 2009 and subsequent taxation years, to refer to property that is a share of the capital stock of a "specified small business corporation". The term "specified small business corporation", as defined in subsection 4901(2) of the Regulations, essentially mirrors the wording of former paragraph 4900(12)(a) of the Regulations.
Subject to certain conditions, paragraph 4900(12)(a) of the Regulations allows a share of a specified small business corporation to be a qualified investment for an RRSP trust provided that, immediately after the acquisition of the share, each person who is an annuitant, a beneficiary or a subscriber under the RRSP is not a connected shareholder of the corporation. For this purpose, a "specified small business corporation" is a corporation (other than a cooperative corporation) that would be a "small business corporation" as defined in subsection 248(1) of the Income Tax Act (the "Act") if the expression "Canadian-controlled private corporation" in that definition were read as "Canadian corporation (other than a corporation controlled, directly or indirectly, in any manner whatever, by one or more non-resident persons)".
The condition that the corporation be a specified small business corporation must be satisfied only at the time the share of the corporation is acquired by a plan trust, or at the end of the taxation year of the corporation that ended before the time the share is acquired. Similarly, the condition that the annuitant, beneficiary or subscriber under a plan trust not be a connected shareholder must be satisfied only at the time immediately after the share is acquired by the plan trust. If these conditions fail to be met at a time after the share has been acquired, the share will not, as a consequence, cease to be a qualified investment for the plan trust.
Generally, a connected shareholder of a corporation at any time, as defined in subsection 4901(2) of the Regulations, is a person who owns, directly or indirectly, at that time, not less than 10% of the issued shares of any class of shares of the corporation or of any corporation related to the corporation. However, if the person deals at arm's length with the corporation and the aggregate cost amount of all the shares of the corporation or of any other related corporation the person owns or is deemed to own, is less than $25,000, the person will not be a connected shareholder of the corporation. Pursuant to paragraph 251(1)(c) of the Act, it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length. Note that for the purposes of the 10% and $25,000 tests, the rules in the definition of "specified shareholder" in subsection 248(1) of the Act apply with the result that certain shares will be deemed to be owned by the shareholder. For example, an annuitant, a beneficiary or a subscriber under a plan trust is deemed to own the shares owned by a person with whom the annuitant, beneficiary or subscriber is not dealing at arm's length, as well as the shares owned by the plan trust.
In a situation where two unrelated individuals use their RRSP trusts to acquire some shares of each other's wholly-owned corporations, it is a question of fact whether the acquired shares will be a qualified investment for each RRSP trust. As noted above, the corporations must be specified small business corporations for the purposes of subsection 4900(12) of the Regulations. Further, the facts and circumstances that occur immediately after the acquisition must be examined in order to determine whether the "connected shareholder" test is met. For instance, where the annuitant under an RRSP owns, directly or indirectly, 10% or more of the shares of the corporation, in order not to be a "connected shareholder" of the corporation, the annuitant has to deal at arm's length with the corporation immediately after the RRSP trust has acquired the shares and the total cost amount of all shares of the corporation or any other related corporation that the annuitant owns, or is deemed to own, must be less than $25,000.
While we trust that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC 70-6R5 and are not binding on the CRA in respect of any particular situation.
Yours truly,
Jenie Leigh
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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