Regulation 4901 - Interpretation

CCRA provided an overview of the connected shareholder and exempt person definitions and indicated:

There is no limit to the amount of equity investment that an RRSP trust may acquire in a particular corporation provided that the 10% test referred to above is satisfied.

Respecting the situation where a number of the limited partners of an SBILP are RRSP trusts, RC stated that "in our opinion, an annuitant under a trust governed by an RRSP is not related to that RRSP, since there is no rule in subsection 251(2) of the Act which causes an annuitant to be related to the RRSP."

Paragraph (d) of the definition of "designated shareholder" does not provide an exception for persons having a nominal interest in a company or having little or no influence concerning its management.

In indicating that shares, preferred shares and participating preferred shares be qualified investments for RRSPs if the conditions of the definition of qualifying share are satisfied, CRA stated:

[A] share that does not qualify for a Patronage Dividend could generally satisfy the condition set out in paragraph 4901(2)(b)

In finding that both of the conditions of the definition of "qualifying share" listed in Reg. 4901(2)(a) and (b) are not required to be satisfied in order for a co-operative share to be a qualified investment, CRA stated:

Where one or other of the conditions in the definition of "qualifying share" in subsection 4901(2) of the Regulations is satisfied, a cooperative share may be a qualified investment if the conditions set out in subsection 4900(12) of the Regulations are otherwise satisfied. For example, subject to subsection 4900(12), a qualifying share that is not entitled to an Allocation in Proportion to Patronage could be a qualified investment.

A corporation in its start-up phase has used a portion of the funds raised to date to cover specific business expenses. Would the remainder of those funds held by it as cash be considered to be used principally in an active business, as required under the “specified business corporation” definition in Reg. 4901(2), such that its shares would be qualified investments for an RRSP under Reg. 4900(14)(a)(i)?

After noting that in order for the funds to so qualify, it would be necessary to first determine that business operations had in fact commenced, CRA provided guidelines (which were “necessarily of a general nature”) on the test of use principally in an active business, including the following:

• Cash or near cash property is considered to be used principally in the business if its withdrawal would destabilize the business.
• Cash which is temporarily surplus to the needs of the business and which is invested in short-term income producing investments may be considered to be used in the business.
• Cash balances which accumulate and are then depleted in accordance with the annual seasonal fluctuations of an ongoing business will generally be considered to be used in the business, but a permanent balance in excess of the company's reasonable working capital needs will generally not be considered to be so used.
• The accumulation of funds in anticipation of the replacement or purchase of capital assets or the repayment of a long-term debt will not generally in itself qualify the funds as being used in the business.
• [C]ash and near cash assets held to offset the non-current portion of long term liabilities will not generally be considered to be used in the business.

In the course of a general discussion, CRA stated:

[A]n SSBC is a corporation that would, at that time or at the end of the last taxation year of the corporation that ended before that time, be a “small business corporation” (SBC) within the meaning of the definition in subsection 248(1) of the Act if certain passages of that definition were changed. Among these, note that the corporation must be a Canadian corporation. Principally, it must be a corporation incorporated in Canada, not a Canadian-controlled private corporation. Furthermore, the corporation must not be controlled directly or indirectly in any manner whatever, by one or more non-resident persons.

To qualify as an SSBC ... all or substantially all of the fair market value of the corporation's assets must be attributable to assets that are, inter alia, used principally in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it. This latter requirement must be analyzed in light of the definition of "active business" in subsection 248(1)....

[T]he term "qualifying active business" in subsection 5100(1) is relevant in the context of the analysis of a qualified investment under subsection 4900(6) while the term "active business" in subsection 248(1) of the Act is relevant in the context of a qualified investment by virtue of subsection 4900(14).

These comments in IT-419R, para. 13 on rights of first refusal and shotgun clauses not being included also applied to Reg. 4901(2.2)(b), so that a person with such a right would not be considered to hold the shares that could be acquired pursuant to such right in determining whether the person was a connected shareholder.