Section 204

Background

Trust, whose central management and control will be in Canada, whose units will be issued on a private placement basis to Canadian investors and which will qualify as a mutual fund trust, will serve as a Canadian feeder fund that subscribes for shares of USco. In order that repurchases by USco of its shares will not be subject to US withholding tax, it will be necessary, when a Trust unitholder wishes to redeem its Trust units, for such units to be redeemed in kind for shares of USco, before such shares are repurchased for cash in its hands. However, in the case of a registered plan, USco shares distributed to it directly would not be a qualified investments.

Proposed transactions

Accordingly, a Buyco will be created. On the day for settlement of a redemption/repurchase transaction, there will be, in quick succession, a transfer by the registered plan of its Trust units to Buyco, a redemption of such units in the hands of Buyco for USco shares, and the repurchase of such shares by USco for consideration consisting of it directing that funds in a Canadian bank deposit previously held for it will thereupon be held for the benefit of the plan, thereby satisfying its obligation to pay the share repurchase price to Buyco, and Buyco’s obligation to pay the purchase price for the Trust units.

Ruling

The registered plan will not thereby be considered to have acquired a non-qualified investment.

As part of its response to the question as to whether a guaranteed investment certificate or term deposit denominated in Canadian or foreign currency issued by a bank in Canada or a trust company a qualified investment for an RRSP, CRA stated:

[A] term deposit, with a term of 5 years or less, denominated in Canadian or foreign currency, issued by a trust company that is a federal institution or a provincial institution within the meaning of the CDICA, could qualify as a qualified investment under paragraph (a) of the definition of "qualified investment" in section 204. However, in some cases, a term deposit issued by such a trust company may not be a deposit within the meaning of the CDICA and may not be a qualified investment. That would be the case where it is money received for which an institution that is a member of CDICA has issued or is obligated to deliver an instrument of indebtedness that is payable outside Canada or in a foreign currency in accordance with subsection 2(6) of the CDSA Schedule.

When asked whether IT-320R2, para. 14 indicated that money denominated in any foreign currency is a qualified investments and whether cash denominated in U.S. dollars can be held in an RRSP, the Directorate stated:

"[M]oney" means banknotes and coins that are legal tender in the country of issue. We are also of the opinion that deposits referred to in paragraph (a) of the definition of qualified investment in section 204 may be denominated in Canadian dollars or in any foreign currency.

Following the amendment retroactive to June 27, 1999 "taxpayers may now approach a financial institution and request that dividends paid in the United States dollars to an RRIF be held in that currency".

Where an RRSP is required to leave cash on deposit with a broker to cover the possible exercise of a call option granted by the RRSP to the option holder to purchase shares from the RRSP, such cash may or may not be a qualified investment. If the cash is left on deposit with a broker for any length of time, the deposit will not be a qualified investment under s. 204(e)(i).

Cash on deposit by an RRSP with a broker to cover the possible exercise of a naked call option written by it would not be considered a qualified investment if the cash were on deposit for any length of time.

As part of its response to the question as to whether a guaranteed investment certificate or term deposit denominated in Canadian or foreign currency issued by a bank in Canada or a trust company a qualified investment for an RRSP, CRA stated:

[I]n general, a guaranteed investment certificate or term deposit, denominated in Canadian or foreign currency and issued by a bank in Canada, would qualify as a bond, debenture, note or similar obligation” specifically described in paragraph (b) of the definition of "qualified investment" in subsection 146(1).

Bonds issued by provincial crown corporations are qualified investments.

A banker's acceptance is not a "similar obligation" because it is a bill of exchange and does not evidence indebtedness of the issuer.

A rating provided by an affiliate or subsidiary of a listed rating agency may be considered a rating provided by the listed rating agency. For the purpose of para. (c.1), CRA will consider a rating assigned by an affiliate or subsidiary to have been assigned by the listed rating agency if it is clear "based on the facts and legal relationships" that the rating agency "would stand by the rating given."

The correspondent also asked about whether, under a rated debt issuance program, each series or tranche of debt must be individually rated for purposes of para. (c.1). CRA stated that individual rating is unnecessary "where it is clear, based on the facts, that all debt obligations issued under the debt issuance program will have the investment grade rating assigned to the debt issuance program."

"In our view, the term "securities" should be given a broad application and interpreted using the ordinary meaning of the term."

Regarding call and put options on currencies listed on the Montreal Exchange, CRA stated:

[S]ecurities, representing currency options listed on the Montreal Exchange, could constitute a qualified investment for a trust governed by an RRSP to the extent that such securities are not futures contracts or other derivative instruments in respect of which the holder’s risk of loss may exceed the holder’s cost.

Prior to the amendments announced by Finance on 18 December 1998, WEBS qualified as shares listed a prescribed foreign stock exchange, whereas SPDRS and Diamonds were not qualified investments.

American depositary shares would be considered to be shares for purposes of s. 7, as CRA previously had concluded that they were shares for purposes of s. 146(1).

Because the Canadian Over-the-Counter Automated Trading System is not a prescribed stock exchange in Canada, shares traded on this system would not be qualified investments unless the corporation was a public corporation.

As part of its response to the question as to whether a guaranteed investment certificate or term deposit denominated in Canadian or foreign currency issued by a bank in Canada or a trust company a qualified investment for an RRSP, CRA stated:

[I]n general, a guaranteed investment certificate or term deposit, denominated in Canadian or foreign currency and issued by a bank in Canada, would qualify as a bond, debenture, note or similar obligation” specifically described in paragraph (b) … .

Furthermore, a guaranteed investment certificate, denominated in Canadian or foreign currency, issued by a trust company incorporated under the laws of Canada or of a province could qualify as a qualified investment under paragraph (f) … .

An American Depository Receipt is a qualified investment for an RRSP because the ADR represents ownership of the underlying shares and assuming that the relationship between the RRSP and the depository does not constitute a trust.

Where the only prescribed stock exchange on which a share is listed is outside Canada, a delisting of the share will generally cause the share to cease to be RRSP eligible. However, cease trading orders or halts in trading will not, of themselves, normally cause the delisting of a share.