19 April 2000 External T.I. 2000-0014455 - CCPC, RRSP, CONNECTED, DESIGNATED

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: Can members of a family that controls a Canadian-controlled private corporation invest up to $25,000 of their RRSPs in shares of the CCPC?

Position: No.

Reasons: The exemption from the 10% limit where cost amount of the shares is less than $25,000 does not apply where there is a non-arm's length relationship between the CCPC and the annuitant.

XXXXXXXXXX 								2000-001445
M.P. Sarazin
Attention:  XXXXXXXXXX 

April 19, 2000

Dear Sir\Madam:

Re: Shares of Private Corporation and Qualified Investments for RRSPs

This is in response to your facsimile of March 16, 2000, wherein you requested our comments regarding family members using funds from their registered retirement savings plans ("RRSP") to acquire shares of their family owned private corporation. In particular, you would like us to discuss the 10% limit exemption where the cost amount of the shares is less than $25,000.

You have been faxed a severed copy of our letter (file #991825) (the "Letter") which deals with shares of corporations qualifying as qualified investments for RRSPs. Since the letter deals with most issues related to the determination of whether shares will qualify as qualified investments for RRSPs, we will restrict our comments to the specific questions raised in your facsimile.

Comments

We cannot confirm whether specific shares are qualified investments for an RRSP except in the context of an advance income tax ruling. Even then, the determination of whether 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 after a review of all of the facts. Therefore, we can provide an advance income tax ruling on the qualification of any particular shares only where the facts can be ascertained before hand. Please refer to the current version of IC 70-6 Advance Income Tax Rulings for instructions on how to apply for an advance income tax ruling. Copies of information circulars and interpretation bulletins are available from your local tax services office or on the internet at the following site - http://www.ccra-adrc.gc.ca/formspubs/menu-e.html.

Question #1

If a family owns more than 10% of the shares of a corporation (assuming that the corporation itself satisfies 4900(6) and 4900(12) of the Income Tax Regulations (the "Regulations")), can the family members collectively invest up to $25,000 of their RRSPs in shares of the corporation?

Position

Our Letter discusses the definition of designated shareholder for purposes of shares that qualify under subsection 4900(6) of the Regulations and the definition of connected shareholder for purposes of shares that qualify under 4900(12) of the Regulations. In the Letter, we have pointed out that the number and value of shares held by related persons (including shares owned by the persons' RRSPs) will be aggregated when determining whether a shareholder is a designated shareholder or a connected shareholder, including the exemption from the 10% limit for shares where the cost amount of all of the shares is less than $25,000.

However, in order for the exemption (from the 10% limit for shares where the cost amount of all of the shares is less than $25,000) to apply, the annuitant has to deal at arm's length with the particular corporation. Interpretation Bulletin IT-419R provides the Canada Customs and Revenue Agencies general views on the meaning of arm's length. We note that members of a family that control a corporation will not deal at arm's length with the corporation and they will be prohibited from using their RRSPs to acquire any shares of the corporation because they will be considered connected shareholders and designated shareholders in respect of the corporation even where they hold shares that in the aggregate are worth less than $25,000.

Question #2

Where an individual wants to use his or her RRSP to invest in a qualifying private corporation and the individual is not related to any of the other shareholders of the corporation, there are no rules subjecting the shareholder to the 10% of the shares of any class limit?

Position

The determination of whether a shareholder is a designated shareholder or connected shareholder applies to all individuals that want to use their RRSPs to invest in the shares of a private corporation. The 10% ownership limit where the cost amount of the shares exceeds $25,000 will apply whether the individual is or is not related to any other shareholder of the particular corporation.

Question #3

In determining the percentage of the corporation's shares owned by the individual (or his or her RRSP), is the computation based on each class of shares of the corporation or in respect of all of the outstanding shares of the corporation?

Position

In our Letter, we noted that a "designated shareholder" and a "connected shareholder" are defined as any person (including an RRSP annuitant) who at the time is, or is related to a "specified shareholder". A specified shareholder is, 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. Therefore, the determination of whether an RRSP annuitant is a designated shareholder or a connected shareholder is done on the basis of the number of shares of a particular class owned by the individual and all related persons at that time.

We have read the revised text that you propose to use in a guide that you will distribute to your clients. We recommend that you revise the text of the guide to properly reflect the comments provided above and in the Letter.

We trust that our Letter and the above comments will be of assistance.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate