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: Whether and how could LSVCC shares increase the foreign property limit of a trust governed by an RRSP.
Position: Based on the current wording of the Act and Regulations, it is our opinion that, generally, an otherwise eligible corporation that is described in both sections 6700 and 6701 of the Regulations (for example an RLSVCC) qualifies as an eligible corporation for the purpose of the small business amount definition in subsection
206(1), even if it is a trader or dealer or a money-lender.
Reasons: Section 5100 of the Regulations defines an "eligible corporation". This definition includes an LSVCC provided it is prescribed under Regulation 6700, but in
paragraph (c) excludes a corporation that is a taxpayer described in subsection 39(5). The Department of Finance, in its July 1997 Technical Notes for amendments made to subsection 39(5), has expressed its intention to make a parallel change to paragraph (c) of the Reg. 5100 definition to exclude mutual fund corporations from the application of that paragraph. Based on the Department of Finance's expressed intention as to how this legislation is designed to function, we have chosen to interpret the existing wording of the paragraph (c) definition of "eligible corporation" as referring to subsection 39(5) as a whole, including its preamble, so that the paragraph (c) exception is not applied to deny mutual fund corporations treatment as eligible corporations.
XXXXXXXXXX 992686
M. P. Sarazin
Attention: XXXXXXXXXX
December 23, 1999
Dear Sirs:
Re: Labour Sponsored Venture Capital Corporations and Subsection 206(2)
This is in response to your letter dated September 16, 1999 to the Large Business Audit Division, which was forwarded to us on October 6, 1999, wherein you requested our views on whether shares of a Labour-Sponsored Venture Capital Corporation ("LSVCC") could serve to increase the 20% foreign property limit of pension plans and registered retirement savings plans ("RRSP"). As you may be aware, on November 1, 1999, Revenue Canada became the Canada Customs and Revenue Agency (the "Agency").
Certain trusts and corporations governed by deferred income plans may be subject to a special tax under Part XI of the Income Tax Act (the "Act") where more than 20% of the cost amount of their property consists of foreign property. The Agency's general views regarding the application of Part XI of the Act are found in Interpretation Bulletin IT-412R2 titled "Foreign Property of Registered Plans". Section 205 of the Act lists the taxpayers who may be subject to the special tax under subsection 206(2) in Part XI of the Act. Paragraph 2 of IT-412R2 lists the taxpayers that may be subject to Part XI of the Act and the list includes:
(a) a trust governed by a RRSP,
(b) a trust governed by a registered pension plan (other than a trust described in subparagraph 205(a)(i) or (ii)),
(c) a corporation, as described in paragraph 149(1)(o.1), incorporated and operated solely for the administration of a registered pension plan and accepted as a funding medium for the purposes of the registration of such a plan, and
(d) a corporation, as described in paragraph 149(1)(o.2), incorporated solely in connection with, or for the administration of, a registered pension plan and whose shares are generally owned by such plans.
For purposes of this discussion we will refer to an RRSP trust although the same rules are equally applicable to the other trusts and corporations described above. Generally, an investment by an RRSP trust in the shares of prescribed LSVCCs would increase the taxpayer's foreign property limit. We must note, however, that the legislative provisions allowing for this result are circuitous and complex and thus no definitive general comments can be provided in this regard. The legislative analysis provided below is technical in nature and it identifies the relevant provisions supporting our conclusion. In the final paragraph of this letter, we summarize our interpretative position.
Legislative Analysis
RRSP trusts which invest more than 20% of their assets in foreign property are subject to a tax with respect to their foreign assets in excess of the 20% limit. The 20% test is applied to the cost amount of all property held by the RRSP and the tax is 1% of the excess foreign property in the RRSP trust at the end of any month. Paragraph 206(2)(c) of the Act, allows an RRSP trust to increase its foreign property limit by as much as 20% of the cost amount of all its property (to a maximum of 40%) where the RRSP trust has a "small business investment amount". The increase to the foreign property limit is three times the small business investment amount (to a 20% of cost maximum). For example, if an RRSP trust holds an investment that qualifies as a small business property and its cost is equal to 5% of the cost amount of all the RRSP trust's property, the RRSP trust will have a foreign property limit of 35%, that being the basic 20% amount plus 15% (3 times 5%)).
The term "small business investment amount" is defined under subsection 206(1) and, for any month, is computed with reference to the average cost of all "small business property" held at the end of each of the previous three months. [Note that in September 1999 the Department of Finance released draft legislation proposing to amend the definition of "small business investment amount" effective for months ending after 1997. The intent of the amendment is to ensure that this amount at any time is, in all cases, no less that the RRSP trust's total cost amount of small business properties at the end of the month.] The term "small business property" is also defined in subsection 206(1). Property may only qualify as small business property of an RRSP trust where the RRSP trust is a prescribed person in respect of the property or is the first person to have acquired the property (other than a broker or dealer in securities) and has owned the property continuously since it was so acquired. [Note that included with the aforementioned September 1999 draft legislation is a proposed amendment to the definition of "small business property" so that certain inter-plan trust transfers (for example, RRSP trust to registered retirement income fund trust) by a single annuitant or between such trusts of spouses will not cause the loss of the 3 for 1 bump in foreign property room. This amendment will also apply for months ending after 1997.] The term small business property includes a property prescribed to be a "small business security", a term defined under subsection 5100(2) of the Income Tax Regulations ("the Regulations"). By virtue of that definition, a security may only qualify as a small business security of an RRSP trust if, immediately after its acquisition, the $10,000,000 cost amount test and the $50,000,000 total assets test provided in paragraphs (e) and (f) of the "small business security" definition are met. The term small business security includes a share of the capital stock of an "eligible corporation". Under subsection 5100(1), an eligible corporation includes a prescribed venture capital corporation described in section 6700 of the Regulations. Section 6700 of the Regulations includes corporations registered under various provincial or territorial statutes as well as registered LSVCCs ("RLSVCCs "). As defined in subsection 248(1) of the Act, an RLSVCC is a corporation registered under subsection 204.81(1) of the Act, the registration of which has not been revoked.
If an LSVCC is an RLSVCC or is otherwise described in section 6700 of the Regulations, is not controlled by one or more non-resident persons and the various other requirements described above have been met, it would, but for the comments below, be an eligible corporation (an "otherwise eligible corporation"), the cost amount of which would be included when computing the small business investment amount of the Plan.
An exception to the definition of eligible corporation, found under paragraph (c) of the definition of eligible corporation in subsection 5100(1) of the Regulations ("paragraph (c)"), provides that a corporation that is a taxpayer described in subsection 39(5) of the Act cannot be included as an eligible corporation, notwithstanding that all of the criteria as described above may have been met.
Subsection 39(5) describes four taxpayers, including, in paragraph 39(5)(a) a corporation that was a trader or dealer in securities (a "trader or dealer") and in paragraph 39(5)(f) a corporation whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof (a "money-lender"). However, the preamble in subsection 39(5), as it reads after June 17, 1998 (and applicable to the 1991 and subsequent taxation years) serves to exclude from its application a taxpayer that is a mutual fund corporation or a mutual fund trust. (Note that the definition of mutual fund corporation in subsection 248(1) refers to the definition provided in subsection 131(8) of the Act, and under that definition an LSVCC prescribed under section 6701 of the Regulations is a mutual fund corporation. Note that RLSVCCs are also described in section 6701 of the Regulations, in addition to being described in section 6700 of the Regulations).
For the purposes of paragraph (c) of the "eligible corporation" definition, it is not evident that the four taxpayers listed in subsection 39(5) should be considered as the taxpayers described in that subsection, or if the preamble -which would exclude mutual fund corporations from the paragraph (c) exception- should also be considered. If the former interpretation is applied, mutual fund corporations (including RLSVCCs) that are traders or dealers or money-lenders will not qualify for the foreign property limit increase as they would not be eligible corporations.
The Department of Finance, in its July 1997 Technical Notes for amendments made to subsection 39(5), has expressed its intention to make a parallel change to paragraph (c) of the "eligib1e corporation" definition to exclude mutual fund corporations from the application of that paragraph. Based on the Department of Finance's expressed intention as to how this legislation is designed to function, we have decided that the better interpretation of the existing wording of paragraph (c) refers to subsection 39(5) as a whole, including its preamble, so that a mutual fund corporation (and therefore an RLSVCC) is not denied status as an eligible corporation.
To conclude, and based on the current wording of the Act and Regulations, it is our opinion that, generally, an otherwise eligible corporation that is described in both sections 6700 and 6701 of the Regulations (for example, an RLSVCC) qualifies as an eligible corporation for the purpose of the small business amount definition in subsection 206(1), even if it is a trader or dealer or a money-lender.
We trust the above comments will be of assistance to you.
Yours truly,
Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
c.c. Claude Englehart
Large Business Audit Division
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1999
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1999
Email this Content