Section 207.04

What is the timing of the acquisition by an RRSP trust of a non-qualified investment that is a share subscribed for by the trust but not paid for (a "non-paid-up share") of a private corporation incorporated under Part 1A of the Quebec Companies Act? CRA responded:

In order to determine the meaning of acquisition, reference must be made to the law applicable to the contractual relationship between the parties. For the purposes of subsection 146(10) [refer now to s. 207.04(1)], the mere fact that a subscribed-for share is a non-paid-up share generally does not affect the time at which a trust acquires the share. In our view, a trust generally acquires a non-paid-up share at the time it owns it under the applicable law, which normally occurs when the share is issued and the subscriber is so notified.

1. An RRSP trust, which holds shares of Company A that are a non-qualified investment, receives a stock dividend comprising additional shares of the same class. 2. The RRSP trust holds shares of Company X, which are a qualified investment, and receives thereon a dividend in kind of shares of Company Y that are a non-qualified investment. Does s. 146(10.1) or 207.04(1) apply? CRA responded:

In Scenario 1, because the shares of Company A are non-qualified investments, the RRSP trust will be subject to Part I tax pursuant to subsection 146(10.1)… in respect of its income from the stock dividends paid by those shares. In addition, the annuitant of the RRSP will be liable for the tax payable on non-qualified investments… pursuant to subsection 207.04(2)…, the… tax payable is equal to 50% of the fair market value of the additional Company A shares at the time they are received… .

In Scenario 2, the annuitant of the RRSP will be liable to pay the 50% tax payable under subsection 207.04(1) of the Act subject to a possible refund of the tax pursuant to subsection 207.04(4) of the Act as a result of the RRSP trust's acquisition of the non-qualified Company Y shares. Because the shares of Company X are qualified investments, the RRSP trust will not be required to pay Part I tax under subsection 146(10.1)… . in respect of… the in-kind dividend of Company Y shares;

In response to a general inquiry, CRA stated:

If a trust governed by a registered plan acquires a qualified investment that later becomes a non-qualified investment, the holder of the TFSA or the annuitant of the RRSP or RRIF will be subject to a tax equal to 50% of the fair market value of the investment at the point in time it becomes non-qualified. In this situation, the tax is refundable if the holder or annuitant disposes of the non-qualified investment before the end of the next year or at any later time the Minister of National Revenue considers reasonable given the circumstances.

The correspondent expressed concern that although the new rules effectively required an RRSP holding shares of a cooperative to dispose of some of those shares, the regulatory regime made it difficult or impossible for the cooperative to repurchase such shares. CRA stated:

Subsection 207.04(4) provides that that tax may be refunded under certain circumstances and under certain conditions (footnote 5). One of these conditions is that the RRSP trust disposes of prohibited investments or non-qualified investments subject to 50% tax before the end of the calendar year following the year in which the 50% tax is applied (or at any later time that the Minister considers reasonable in the circumstances). In this regard, proposed subsection 207.01(6) provides for a deemed disposition and re-acquisition, such as when property held by an RRSP trust ceases to be a prohibited investment or a non-qualified investment. It follows that the annuitant of an RRSP trust subject to the tax under subsection 207.04(1) could, among other things, depending on the applicable circumstances, require that the RRSP trust dispose of all or part of the cooperative shares that it holds in order to qualify for this refund. The repurchase of the shares by the cooperative is only one of the ways in which the RRSP trust can dispose of cooperative shares that have become excess shares by virtue of the new rules.