Principal Issues: Whether subscription receipts issued by a private Canadian corporation are qualified investments if they entitle the holder to acquire treasury shares of the corporation after they become listed on a designated stock exchange.
Position: Not until the shares are listed on a designated stock exchange.
Reasons: The underlying property of the subscription receipts must be a qualified investment the entire time the subscription receipts are held by a trust governed by a RRSP.
XXXXXXXXXX 2009-034500 A. Townsend March 15, 2010
Dear XXXXXXXXXX :
Subject: Subscription Receipts as a Qualified Investment
This is in reply to your letter of October 16, 2009, in which you requested an interpretation on whether a subscription receipt is a qualified investment for a trust governed by a registered retirement savings plan ("RRSP") in a hypothetical situation.
The hypothetical situation that you have described concerns a private Canadian corporation that issues subscription receipts in connection with the anticipated public offering of its shares. The holders of the subscription receipts are entitled to acquire treasury shares of the corporation for no consideration provided that a number of conditions are satisfied, including the listing of such shares on a designated stock exchange. If certain conditions are not satisfied, the subscription receipts will be cancelled and the cash funds returned to the investor.
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, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
Paragraph 4900(1)(e) of the Income Tax Regulations (the "Regulations") provides that an option, a warrant or a similar right is a qualified investment for a trust governed by an RRSP if it gives the holder the right to acquire, either immediately or in the future, property all of which is a qualified investment for the RRSP trust or to receive a cash settlement in lieu of delivery of that property. In general, the property that may be acquired must be a share, a unit or a warrant on a share or unit of the issuer or a person or a partnership with which the issuer does not deal at arm's length or a debt issued by the issuer or a person or a partnership with which the issuer does not deal at arm's length.
Also, the issuer of the option, warrant or similar right cannot be a connected person in relation to the RRSP trust.
In our view, this paragraph requires that the underlying property to be acquired by the option, warrant or similar right must be a qualified investment the entire time the subscription receipt is held by the trust governed by an RRSP.
In your situation, it is our understanding that the underlying properties of the subscription receipts are treasury shares of a corporation which will only be a qualified investment when they become listed on a designated stock exchange. Therefore, it is our view that until the treasury shares are listed on a designated stock exchange, the subscription receipts would not provide the right to acquire properties that are qualified investments and would not be qualified investments pursuant to paragraph 4900(1)(e) of the Regulations.
We trust these comments will be of some assistance.
Louise J. Roy, CGA
Manager
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch