24 July 2006 External T.I. 2005-0154551E5 - RRSPs - Foreign property and qualified investments

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.

Principal Issues: Are there any tax concerns regarding the rules governing RRSPs and a particular investment as the investment changes over its life cycle?

Position: General Comments given.

Reasons: See IT-320R3

XXXXXXXXXX 							2005-015455

July 24, 2006

Dear XXXXXXXXXX:

Re: Foreign Content Rules for Registered Retirement Savings Plans ("RRSPs")

This is in response to your letter of September 23, 2005, inquiring about the foreign content rules for RRSPs. Specifically, you have requested our views on whether the shares of certain corporations are qualified investments for RRSPs and you have inquired about the effect of the elimination of the foreign property limits for RRSPs on these investments.

In the situation you are considering, a holding corporation ("Holdco") was formed in XXXXXXXXXX as a venture capital corporation ("VCC") to invest in a Canadian private corporation. The VCC was described in section 6700 of the Income Tax Regulations (the "Regulations") and was, therefore, in accordance with paragraph 4900(12)(b) of the Regulations, a qualified investment for an RRSP at the time. However, Holdco lost its VCC status in XXXXXXXXXX.

As noted above, the VCC was established to invest in a Canadian private corporation ("Opco") that was active in the development, manufacture and sale of new products. In XXXXXXXXXX, control of Opco was acquired by a Canadian affiliate of a foreign private corporation, and while you indicated that this Canadian affiliate was subsequently 'absorbed into' its foreign parent, we understand that it, in fact, has become a wholly-owned subsidiary of its foreign parent.

In the situation you are considering, individuals may have held shares of the VCC/Holdco or shares of the Opco in their RRSPs.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address:

http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.

For 2004 and prior taxation years, Part XI of the Income Tax Act (the "Act") imposed a tax on a trust governed by a deferred income plan, such as an RRSP, where the cost amount of foreign property held exceeded a specified percentage of the cost amount of all of the property held. The specified percentage for the foreign property rules was 20 per cent in the 1990s and was raised to 30 per cent in 2001. In situations involving certain VCCs, this specified percentage could be enhanced. Plan assets in excess of those limits were subject to a 1% per month penalty tax. As you are aware, for 2005 and subsequent taxation years, the foreign property rules were repealed. As you requested in your letter, we confirm that the repeal of the foreign property rules, for purposes of the application of Part XI tax on a trust governed by a deferred income plan, is applicable to any share of the stock of a corporation, whether private or public.

With respect to the situations prior to the repeal of the foreign property rules, whether a share of a particular corporation was foreign property at any particular time was a question of fact, however, CRA's general views regarding foreign property are expressed in Interpretation Bulletin IT-412R2 entitled "Foreign property of registered plans". Generally, shares of a corporation (Opco) that was incorporated and resident in Canada and that operates in Canada would not be considered to be foreign property nor would the shares of a corporation (VCC/Holdco) that was incorporated in and is resident in Canada and that derives its value from an investment in such an operating company.

Under the Act, there is also a tax on non-qualified investments held in an RRSP that were qualified investments when acquired. In effect, under Part XI.1 of the Act, the trust must pay a tax of 1% of the fair market value of the property at the time it was acquired on any non-qualified investment held by the trust at the end of each month. In addition, the RRSP trust is taxable under Part I of the Act on the income and gains of the non-qualified investment by virtue of subsection 146(10.1) of the Act. It should also be noted that if a particular property was a foreign, non-qualified investment, only the tax on non-qualified investments would have applied. The qualified investment rules were not repealed with the foreign property rules and are still applicable.

With respect to your situation we note that if a corporation (Holdco) was a prescribed VCC at the time the shares of that corporation were acquired, those particular shares would continue to be a qualified investment for that RRSP, while any shares that were acquired after it ceased to be a prescribed VCC would only qualify if they satisfy one of the criteria set out in paragraph 9 of IT-320R3. Similarly, shares of an operating company (Opco) that were shares of a small business corporation that satisfied the provisions of paragraph 4900(12)(a) of the Regulations (as explained in paragraph 6 of IT-320R3) at the time they were acquired by an RRSP, would continue to be qualified investments for that RRSP. However, additional shares of such a company would not be qualified investments for any RRSP if they were acquired after the corporation ceased to satisfy that provision. This would occur for example, if and when the corporation became controlled directly or indirectly by a foreign corporation.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch