Principal Issue: [TaxInterpretations translation]
Are qualifying shares in respect of a cooperative acquired by an RRSP trust (representing XXXXXXXXXX% of the shares) a qualified investment under subsection 4900(12) of the Regulations if the annuitant had been living in a conjugal relationship for less than twelve months with a person who also held XXXXXXXXXX% of the shares through his or her RRSP?
Position:
Question of fact.
REASON:
Possible application of paragraph 251(1)(b) of the Act.
January 29, 2001
Rouyn-Noranda Tax Services Office Headquarters
Financial Industries Division
Attention: Claire Descôteaux
L. J. Roy, CGA2000-006282
Qualified investments
This is further to your fax of December 14, 2000, addressed to Mr. Pierre Beaudry of the Contributions Division, who has asked us to respond.
Our understanding of the facts relating to the situation you have submitted to us is as follows.
FACTS
In XXXXXXXXXX, the trust governed by Mr. A's registered retirement savings plan (“RRSP”) and the trust governed by Ms. B's RRSP each acquired approximately XXXXXXXXXX% of the shares of the capital stock of a cooperative corporation at a cost of $XXXXXXXXXX and $XXXXXXXXXX respectively. The balance of the shares of the cooperative was held by persons unrelated to Mr. A and Ms. B.
In XXXXXXXXXX, Mr. A and Ms. B began living in a conjugal relationship and were married on XXXXXXXXXX.
YOUR QUESTION
Will the shares of the capital stock become a non-qualified investment once their common-law relationship has existed for more than 12 months or on the date of their marriage? As of that date, will the trust governed by the RRSP be subject to tax under Part XI.1 of the Income Tax Act (the “Act”)?
OUR COMMENTS:
Under subsection 4900(12) of the Income Tax Regulations (the “Regulations”), a qualifying share in respect of a specified cooperative corporation is a qualified investment for a trust governed by an RRSP provided that the annuitant under the plan was not a connected shareholder of the corporation immediately after the time the qualifying share was acquired by the trust.
The share will not become a non-qualified investment if the annuitant subsequently becomes a connected shareholder. Consequently, the trust governed by the RRSP will not be subject to tax under Part XI.1 of the Act if the annuitant subsequently becomes a connected shareholder.
In the case of property acquired after November 29, 1994, subsection 4901(2) of the Regulations provides that a connected shareholder of a corporation at any time is a person (other than an exempt person in respect of the corporation) who owns, directly or indirectly, at that time, not less than 10% of the issued shares of any class of the capital stock of the corporation or of any other corporation that is related to the corporation. For this purpose, subsection 4901(2.1) of the Regulations provides that each share of the capital of a specified cooperative corporation and all other shares of the capital of the corporation that have attributes identical to the attributes of that share shall be deemed to be shares of a class of the capital stock of the corporation.
An exempt person in respect of a corporation is a person who deals at arm’s length with the corporation where the total of all amounts, each of which is the cost amount of any share of the capital stock of the corporation, or of any other corporation that is related to it, that the person owns or is deemed to own for the purposes of the definition specified shareholder in subsection 248(1) of the Income Tax Act, is less than $25,000.
For the purposes of the 10% test and the $25,000 limit, the annuitant of an RRSP is deemed to own the shares held by his RRSP and those owned by a person with whom the annuitant does not deal at arm’s length (see the definition of “specified shareholder” in paragraphs 248(1)(a) and (b) of the Act). In addition, any shares that the annuitant or a related person is entitled to acquire must be taken into account (see subsection 4901(2.2) of the Regulations).
In accordance with paragraph 251(1)(a) of the Act, related persons are deemed not to deal with each other at arm's length. Under paragraph 251(2)(a) of the Act, individuals connected by marriage are related persons. Paragraph 251(6)(b) of the Act provides, among other things, that two persons are connected by marriage if one is married to the other. Under paragraph 252(4)(b), marriage may be a conjugal relationship between two individuals who are, because of paragraph 252(4)(a) of the Act, spouses of each other.
Paragraph 252(4)(a) of the Act requires, among other things, that in order to be considered the spouse of a taxpayer at a particular time, a person must satisfy two criteria: first, that a person of the opposite sex must cohabit at that time with the taxpayer in a conjugal relationship and, second, that person must either have so cohabited throughout a 12-month period ending before that time, or be a parent of a child of the taxpayer. As long as one of those two criteria is not met, the taxpayer and this person are considered to be unmarried in relation to this union.
Assuming that Mr. A and Ms. B had no children, we are of the view that, immediately after their respective RRSP trusts acquired a qualifying share in respect of the cooperative corporation in XXXXXXXXXX, they were not persons not dealing at arm's length under paragraph 251(1)(a) of the Act.
However, for the purposes of the definitions of connected shareholder and exempt person, we are of the view that the not dealing at arm’s length relationship under paragraph 251(1)(b) of the Act must be taken into account in determining whether the RRSP annuitant was not dealing at arm's length with the person with whom the annuitant was living in a conjugal relationship and with the corporation. Whether unrelated persons were dealing at arm's length at a particular time under paragraph 251(1)(b) of the Act is a question of fact. In this regard, we refer you to Interpretation Bulletin IT-419R.
ACCESS TO INFORMATION
For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Acting Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
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