5 August 1999 External T.I. 9912145 - RRSP INVESTMENT IN SHARES OF CCPC

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 ISSLES:

Are shares of particular corporation qualified investments for an RRSP?

Position:

Provided our standard reply on this topic.

Reasons:

We can not comment on the qualification of a specific corporation as it is a question of fact.

XXXXXXXXXX						991214
W.  C. Harding

Attention: XXXXXXXXXX

August 5, 1999

Dear Sirs:

Re: Shares of eligible corporations and small business corporations as qualified investments for RRSP and RRIF trusts

This is in reply to your letter of February 2, 1999, to the Sudbury Taxation Centre, which was forwarded to us for reply, wherein you requested confirmation that shares of your corporation would be qualified investments for an PRSP trust (hereinafter referred to as the "Plan").

We cannot confirm whether specific shares are qualified investments for a Plan except in the context of an advance income tax ruling. Note, however, that the determination of whether shares of a particular corporation are qualified investments is a question of fact that can only be determined on a case by case basis and after a review of all of the facts at the time of acquisition of the shares. Therefore, we can provide an advance income tax ruling on the qualification of any particular shares only where the facts can be ascertained before hand. Generally, an annuitant of a Plan may rely on the trustee or an agent for the trustee of a self-directed Plan to make such a determination at the time of purchase. The following is an overview of the rules respecting Plan investments in shares of a corporation for your information.

Generally a Plan 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") - please refer to the current version of IT-391 for a discussion of public corporation status. (Copies of Interpretation Bulletins are available from your local tax services office or on the Internet at the following site - http://www.rc.gc.ca). It should be noted that for purposes of the Act, life insurance corporations are considered to be public corporations.

When the shares of a corporation do not qualify as investments for a Plan as noted above, they may qualify under subsection 4900(6) of the Income Tax Regulations (the Regulations") if the corporation is an "eligible corporation" or under subsection 4900(12) of the Regulations if the corporation is a "small business corporation". These terms are defined in the Act and Regulations and are discussed in greater detail below. A corporation may frequently satisfy the conditions in subsection 4900(12) but not meet the conditions in subsection 4900(6). However, it is only necessary to satisfy one of the subsections.

Under subsection 4900(6) shares of an eligible corporation, within the meaning assigned by subsection 5lOO(1) of the Regulations, would be a qualified investment for a Plan if the annuitant under the Plan is not a "designated shareholder", within the meaning assigned by subsection 4901(2) of the Regulations. Under subsection 4900(12) of the Regulations, shares of a corporation (other than a cooperative corporation) that would, at that time or at the end of the last taxation year of the corporation ending before that time, be a small business corporation are qualified investments for a Plan if immediately after the time the shares were acquired by the trust the annuitant under the Plan was not a "connected shareholder" of the corporation. For the purposes of subsection 4900(12) of the Regulations, a "small business corporation" has the meaning assigned by subsection 248(1) of the Act if the reference therein to "Canadian-controlled private corporation" is read as "Canadian corporation (other than a corporation controlled at that time, directly or indirectly in any manner whatever, by one or more non-resident persons)". The expression "connected shareholder" has the meaning assigned by subsection 4901(2) of the Regulations.

In brief an "eligible corporation" is generally a taxable Canadian corporation which uses substantially all (90% or more) of its property in a "qualifying active business". Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt, and corporations controlled by non-residents.

A "qualifying active business" is also a defined term which generally includes a retail or wholesale business and any business which is carried on in Canada except one where the principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property. A corporation's business will be considered to have been carried on in Canada if at least 50% of its employees are engaged in the business in Canada or at least 50% of its salaries or wages are paid for services provided in Canada in respect of the business. If the corporation is part of a group of related corporations, the combined services of their employees and the combined salaries and wages paid must be considered in making this determination.

With respect to property acquired by a Plan after November 29, 1994, a "designated shareholder" of a corporation is any Plan annuitant who at the time:

(a) is, or is related to, a "specified shareholder" (generally, a person who directly or indirectly holds 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation), unless the cost amount of all the shares is, in total, less than $25,000. For this purpose, an annuitant of a Plan is deemed to own the shares owned by the Plan (see definition of "specified shareholder" in paragraph 248(l)(b) of the Act), and any share that the Plan annuitant or a related person has a right to acquire is included for purposes of the 10% and $25,000 tests (see subsection 4901(2.3) of the Regulations);

(b) is or is related to a member of a partnership that controls the corporation in any manner;

(c) is or is related to a beneficiary under a trust that controls the corporation in any manner;

(d) is or is related to an employee of the corporation where the employees control the corporation, except where the corporation is controlled by one person or a related group of persons; or

(e) does not deal at arm's length with the corporation.

The conditions respecting both the "eligible corporation" and the "designated shareholder" must be satisfied at the time the Plan acquires the shares and thereafter. Should the annuitant become a "designated shareholder" of the corporation or the corporation fails to be an "eligible corporation" at a later date, the shares will no longer be qualified investments for the Plan under subsection 4900(6) of the Regulations.

Subsection 4900(12) of the Regulations (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 a Plan, provided that the Plan annuitant is not a "connected shareholder" of the corporation immediately after the acquisition of the share.

The corporation must be a "small business corporation" at the time the share is acquired by the Plan or at the end of the taxation year of the corporation ending before the time the share is acquired. For this purpose, a "small business corporation" is a Canadian corporation that is not directly or indirectly controlled by one or more non-residents. In addition, to qualify as a "small business corporation" all or substantially all (90% or more) of the fair market value of the corporation's assets must be attributable to assets that were:

(a) used principally (50% of the time or more) in an active business carried on primarily in Canada by the particular corporation or by a corporation related to it,

(b) shares or indebtedness of other small business corporations which were connected with the particular corporation, or

(c) assets described in a and b above.

For the purposes of these requirements, an "active business" is, in general, defined as any business carried on by a taxpayer other than a "specified investment business" or a "personal services business". A "specified investment business" is defined as a business the principal purpose of which is to derive income from property including such income as interest, dividends rent and royalties. Gains from the disposition of real property may or may not be from an active business. Please refer to the current version of IT-73 for more information on these topics.

It is important to note that the shares of a CCPC must qualify at the time they are acquired by a Plan. Shares of a newly formed corporation would will not generally quality prior to the start of an active business. With respect to property acquired by a Plan after November 29, 1994, a "connected shareholder" of a corporation is generally a person who directly or indirectly owns 10% or more of the shares of any class of shares of the corporation or of any corporations related to the corporation. Furthermore, through the application of paragraphs (a) to (e) of the definition of "specified shareholder" in subsection 248 1) of the Act and the application of subsection 4901(2.2) of the Regulations, an annuitant of a Plan will be considered to own all of the shares owned by the Plan or any person not dealing at arm's length with the annuitant, a proportion of any shares owned by certain trusts and partnerships and any share that the Plan annuitant or a related person has a right to acquire. However, an annuitant will not be a "connected shareholder" if he or she deals at arm's length with the corporation and the cost amount of all the shares is, in total, less than $25,000.

Note that the conditions respecting the "small business corporation" must be satisfied only at the time the shares are acquired by the Plan or at the end of the taxation year of the corporation ending before the time the share is acquired. Similarly, the conditions respecting the "connected shareholder" must be satisfied only once, at the time immediately after the shares are acquired by the Plan.

Should the corporation fail to remain a "small business corporation" or the annuitant become a "connected shareholder" at a later time the shares will not consequently become non-qualified investments for the Plan. However, in accordance with subsection 4900(13) of the Regulations a share of a "small business corporation" will become non-qualified, if:

i. an individual provides services to or for, acquires goods from, or is provided services by, the issuer of the share or a person related to the issuer;

ii. an amount is received by the Plan in respect of the share; and

iii. the amount can reasonably be considered to be

(A) on account of or in lieu or in satisfaction of, payment for the services to or for the issuer or the person related to the issuer, or

(B) in respect of the acquisition of the goods from, or services provided by, the issuer or the person related to the issuer.

We trust these comments will be of assistance.

Yours truly,

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