| 19(1) | File No. 5-8687 |
| A.B. Adler | |
| (613) 957-8962 |
October 19, 1989
19(1)
This is in reply to your letter dated September 13, 1989 in which you requested our views regarding the eligibility of certain types of options for Registered Retirement Savings Plans ("RRSPs").
Our comments follow the order of the items described in your letter.
(a) Covered Call Options
The writing of covered call options is not subject to the rules governing qualified investments as it does not involve the acquisition of property or a right by the RRSP (refer to paragraph 4900(1)(e) of the Income Tax Regulations ("Regulations")). Instead cash is received as a means of possibly increasing the proceeds from the sale of shares, bonds, etc.
Where the RRSP has the underlying qualifying investment and the holder of the covered call option has in fact exercised his right to purchase under the option, Departmental practice is not to apply the provisions of subsection 146(9) of the Income Tax Act ("Act") (dealing with dispositions of property by the RRSP for less than fair market value) to the annuitant.
(b) Regular Call Options
The acquisition of a call option that is listed on a prescribed stock exchange in Canada, giving the RRSP the right to acquire shares or bonds that are qualified investments, will be a qualified investment for an RRSP under paragraph 4900(1)(e) of the Regulations.
(c) Hedged Put Options and Regular Put Options
A purchased put option gives the holder the right to dispose of shares, rather than the right to acquire shares and is therefore not a qualified investment for a RRSP under paragraph 4900(1)(e) of the Regulations or under paragraph 146(1)(g) of the Act. Since the RRSP trust acquires a non-qualified investment, subsection 146(10) of the Act, a penalty provision, will apply to the annuitant with the result that the fair market value of the put option is included in the income of the annuitant.
The purchase of put options could, in some circumstances, be considered to be a business activity and may subject the RRSP trust to tax under Part I of the Act by reason of paragraph 146(4)(b) thereof.
We trust that our comments will be of assistance to you, and regret the delay in providing them to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate