Principal Issues: The submitter requested our comments on whether a small business investment trust would be a qualified investment for an RRSP.
Position: General summary of the provisions in the Act and Regulations relating to qualified investments provided.
Reasons: A question of fact; overview of legislation provided.
XXXXXXXXXX 2005-012911 P. Kohnen, CMA June 6, 2005
Dear XXXXXXXXXX:
Re: Technical Interpretation - Small Business Investment Trusts
This is in response to your submission of May 5, 2005, in which you requested our comments in respect of whether a small business investment trust ("SBIT") would be a qualified investment for a registered retirement savings plan ("RRSP").
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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.
Our comments
The types of property that constitute a qualified investment for a trust governed by an RRSP are described in the definition of "qualified investment" in subsection 146(1) of the Income Tax Act. Pursuant to paragraph (d) of that definition, investments prescribed in section 4900 of the Income Tax Regulations (the "Regulations") will also be qualified investments.
Subject to the provisions of subsections 4900(8) and (9), as well as subsection 5104(4), of the Regulations, an interest in a SBIT will be a qualified investment for an RRSP. A trust will be a SBIT at a particular time if at all times after it was created and before that time, it meets all of the requirements in subsection 5103(1) of the Regulations.
Pursuant to paragraph 5103(1)(e) of the Regulations, the trust must comply with subsection 5103(2) of the Regulations, which establishes certain minimum required holdings of small business securities ("SBS"), that must be held at any time if the trust is to maintain its SBIT status. Subsection 5100(2) of the Regulations provides the requirements that must be met for a property to be a SBS.
Pursuant to subsection 4900(8) of the Regulations, where a trust that is governed by an RRSP holds an interest in a SBIT that holds a SBS, and a person who is an annuitant or beneficiary of the RRSP provides services to or for the issuer of the SBS, or to or for a person related to the issuer, and it can reasonably be considered that any amount received in respect of the SBS is on account, in lieu or in satisfaction of payment for the services, then the interest in the SBS will cease to be a qualified investment immediately before the amount is received.
Pursuant to subsection 4900(9) of the Regulations, where a trust governed by an RRSP holds an interest in a SBIT that holds a SBS of a corporation and a person who is an annuitant or beneficiary of the RRSP is a designated shareholder of the corporation, the interest will not be a qualified investment unless the conditions in paragraphs 4900(9)(c) to (g) are met.
It should also be noted that where a person who holds an interest in a SBIT knew at the time of the issue of the interest, or at the time of contributing in respect of the interest, that a substantial portion of the consideration or contribution would not be invested in SBS's, and all or substantially all of the consideration or contribution would be returned within 24 months, then subsection 5104(4) of the Regulations would deem the trust to not be a SBIT.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Mr. Phil Kohnen at (613) 957-2093 should you require further information.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate