4 February 2002 External T.I. 2001-0110035 - QSB-HOLDING PERIOD TEST

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 1. Does the holding period requirement in the definition of qualified small business corporation shares include time that the individual holds shares in his self directed RRSP?

Position: 1. Yes

Reasons: 1. Holding period includes time held by person related and para. 110.6(14)(c) deems a personal trust to be related to its beneficiary for purposes of the QSBC definition. A self directed RRSP is a personal trust per the definition in 248(1).

2001-011003
XXXXXXXXXX Lena Holloway, CA
613-957-2104
February 4, 2002

Dear XXXXXXXXXX:

This is in reply to your letter of November 8, 2001, which requested a written opinion on a specific proposed transaction in respect of your self-directed RRSP. The particular circumstances in your letter on which you have asked for our views appear to be a factual situation. As explained in Information Circular 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If you which to obtain a binding commitment with respect to an actual case similar to that outlined in your letter, an advance income tax ruling application should be submitted. Although we are unable to provide any binding assurance here with respect to the queries you have raised, we do provide the following general comments for your information.

All references herein are to the Income Tax Act (Canada) (the "Act") unless otherwise indicated.

Our Comments

The definition of "qualified small business corporation share" of an individual in subsection 110.6(1) sets out some of the conditions that must be met in determining the eligibility for the capital gains exemption on the disposition of such shares. One of these conditions is that the share must not have been owned by anyone, other than the individual or a person or a partnership related to the individual throughout the 24-month period immediately preceding the disposition.

Under paragraph 110.6(14)(c), a personal trust is deemed to be related to a person or partnership throughout any period during which the person or partnership is a beneficiary of the trust. A personal trust is defined in subsection 248(1) as including an inter vivos trust in which no beneficial interest was acquired for consideration payable to the trust or to a person who has made a contribution to the trust. A self-directed RRSP trust qualifies as a personal trust by reason of subparagraph 108(7)(b)(i) as all of the beneficial interests in such a trust are acquired by one person. Where shares are held inside an individual's self-directed RRSP trust and are subsequently transferred to the individual/beneficiary to hold personally, the relevant holding period for purposes of the definition of qualified small business corporation share is the combined period held both by the RRSP trust and the individual personally.

You should also note that the determination of the proper income tax consequences relating to any transaction between an annuitant and the annuitant's RRSP will depend on an analysis of all the facts, documentation and other information pertaining to the particular situation in relation to the requirements of the Act. Generally, transactions between an annuitant and his or her RRSP trust are subject to subsections 69(1) and 146(9). Paragraph 69(1)(a) deems property acquired from a non-arm's length person for consideration in excess of fair market value to be acquired at fair market value, and paragraph 69(1)(b) deems property disposed of to a non-arm's length person for proceeds less than fair market value to be disposed of at fair market value. In addition, where an RRSP trust disposes of property for a consideration less than fair market value of the property or acquires property for a consideration greater than the fair market value, the difference between the fair market value and the consideration is income of the annuitant in the year pursuant to subsection 146(9).

In addition to considering the fair market value of the properties being exchanged, such an exchange represents a purchase and sale of property, and may represent a "premium" paid by the annuitant to his RRSP and a "benefit" received from his RRSP (see definition of "premium" and "benefit" in subsection 146(1)). Where the exchange represents a bona-fide purchase and sale of property at fair market value, the RRSP trustee would not be required to issue a T4RSP reporting slip. However, where the exchange does in fact represent a premium paid to the RRSP and a benefit received from the RRSP the tax treatment of these amounts will be based on the rules in section 146, and, in the case of a trust, a T4RSP reporting slip would be required (see IT-124R6- enclosed).

We trust the above comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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