8 June 1995 Internal T.I. 9507796 - CONVERTIBLE EMPLOYER DEBT IN RRSP

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 Department.

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

Principal Issues:

Determination of whether convertible promissory note is a qualified investment for an RRSP.

Position TAKEN:
	General discussion of debt and shares as qualified 	investments.

Reasons FOR POSITION TAKEN:

Routine.

			June 8, 1995

	HEADQUARTERS				HEADQUARTERS
	Registered Plans Division		P. Spice
	Stella Black				(613) 957-8953
	Director
	Attention:  Ms Margaret Snel		950779

Convertible Employer Debt as Qualified Investment

This is in reply to your memorandum of March 21, 1995, in which you ask our opinion of whether an investment described in the Declaration of Trust for the XXXXXXXXXX Group registered retirement savings plan (RRSP) is a "qualified investment" for an RRSP. You enclosed a copy of the Declaration of Trust for our information.

We are unable to provide a definitive answer to your query and would note that if XXXXXXXXXX wishes the Department's views on a proposed transaction it should apply for an advance income tax ruling in accordance with the instructions in Information Circular 70-6R2. The following are general comments on the applicable law and our interpretation which you may pass on to XXXXXXXXXX or the RRSP trustee with the advice that they are not binding on the Department.

Qualified investments for a trust governed by an RRSP are listed in subsection 146(1) and section 204 of the Income Tax Act (the "Act") and section 4900 of the Income Tax Regulations (the "Regulations"). Generally speaking, a debt owing by a corporation to a trust governed by an RRSP would represent a qualified investment of the RRSP only if the debt is:

(a) a bond, debenture, note, or similar obligation of a corporation the shares of which are listed on a prescribed stock exchange in Canada (paragraph (b) of the definition of "qualified investment" in subsection 146(1) of the Act);

(b) a bond, debenture, note, or similar obligation of a public corporation (defined in subsection 89(1) of the Act) other than a mortgage investment corporation (paragraph 4900(1)(c.1) of the Regulations); and

(c) a bond, debenture, note, or similar obligation of a Canadian corporation which is guaranteed by a corporation or a mutual fund trust whose shares or units are listed on a prescribed stock exchange in Canada (subparagraph 4900(1)(i)(i) of the Regulations);

(d) a bond, debenture, note, or similar obligation of a Canadian corporation which is controlled directly or indirectly by one or more corporations or mutual fund trusts whose shares or units are listed on a prescribed stock exchange in Canada (subparagraph 4900(1)(i)(ii) of the Regulations);

(e) a bond, debenture, note, or similar obligation of a Canadian corporation where the conditions described in subparagraph 4900(1)(i)(iii) of the Regulations are met which, in part and in general terms, require the corporation to have share equity of at least twenty five million dollars or be controlled by such a corporation and have issued and outstanding debt of at least ten million dollars;

(f) a security of a Canadian corporation

(i) that was issued pursuant to The Community Bonds Act S.S. 90, c. C-16.1, The Rural Development Bonds Act S.M. 91-92, c. 47, the Community Economic Development Act 1993 S.O. 93, c. 26, or the New Brunswick Community Development Bond Program through which financial assistance is provided under the Economic Development Act N.B. 75, c. E-1.11, and

(ii) the payment of the principal amount of which is guaranteed by Her Majesty in Right of a province

		(paragraph 4900(1)(i.1) of the Regulations).

(g) indebtedness of a Canadian corporation (other than a corporation that does not deal at arm's length with a person who is an annuitant under the RRSP trust) represented by a bankers' acceptance (paragraph 4900(1)(i.2) of the Regulations);

(h) a bond, debenture, note, or similar obligation of a corporation the shares of which are listed on a stock exchange referred to in section 3201 (i.e., prescribed stock exchanges outside Canada) (paragraph 4900(1)(p) of the Regulations); or

(i) a bond, debenture, note, mortgage, or similar obligation as described in paragraph (b) of the definition of "qualified investment" in section 204 of the Act, namely:

(i) bonds of or guaranteed by Government of Canada issued on or before December 20, 1960,

(ii) bonds of or guaranteed by the Government of Canada issued after December 20, 1960, and before April 16, 1966, the interest on which is payable to another country or to a Regulation 806 or 806.1 international organization or agency, or

(iii) bonds, debentures, notes, mortgages, or similar obligations

of or guaranteed by the Government of Canada,

of the government of a province or an agent thereof,

of a Canadian municipality or municipal or public body performing a function of government in Canada,

of a body 90% or more of which is owned by a province or Canadian municipality or of a wholly-owned subsidiary of such a body, or

of an educational institution or hospital if repayment of principal and payment of interest is to be made, or is guaranteed, assured, or otherwise specifically provided for or secured, by a province.

There are other provisions which also allow RRSP's to hold debt of Canadian corporations. However, these are directed to particular types of corporations such as credit unions or cooperative corporations.

The annuitant is required to determine that the promissory notes are qualified investments at the time the RRSP invests in them and will also have to determine if the debentures are qualified investments at the time the notes are converted.

Shares of a corporation are qualified investments for an RRSP under several provisions. Generally an RRSP can invest in shares of a corporation if the shares are listed on a prescribed stock exchange in Canada or in a country other than Canada, or if the corporation is a "public corporation" as defined in the Income Tax Act (the "Act") - see the current version of Interpretation Bulletin IT-391 for more information on public corporation status.

When the shares of a corporation do not qualify as investments for an RRSP as noted above, they may qualify if they are shares of a "Canadian-controlled private corporation" (CCPC) which is an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that company. These latter two terms are defined terms and their meanings are provided in sections 4900 through 5103 of the Income Tax Regulations. In addition, subsection 4900(12) of the Income Tax Regulations (passed June 23, 1994, applicable after December 2, 1992) was introduced to allow a share of the capital stock of a "small business corporation" to be a qualified investment for an RRSP, provided that the RRSP annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share. If you or XXXXXXXXXX require more information concerning these rules, please advise.

The acquisition of a non-qualified investment by an RRSP will subject the annuitant to an income inclusion under subsection 146(10) of the Act. Upon disposal of the non-qualified investment a deduction may be taken to the extent permitted by subsection 146(6) of the Act. Where a qualified investment becomes non-qualified (in other words, there is no acquisition of a non-qualified investment) and the 146(10) income inclusion does not apply, the Part XI.1 tax is levied against the RRSP trust. So long as the annuitant disposes of the non-qualified investment before the end of the month in which it became non-qualified, the tax will not be exigible. See paragraphs 17 and 18 of Interpretation Bulletin IT-320R2 for a discussion of subsection 146(10) and Part XI.1 of the Act.

We trust this information will assist.

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch