5-911345
Dear Sirs:
Re: Venture Capital Corporations
This is in reply to your letter of May 9, 1991 to which was attached a copy of your letter dated January 22, 1991 to the Department and for which you have not received a reply. It appears that this letter was misdirected or never received by the Department.
You enquire as to whether or not a venture capital corporation would qualify as a small business investment for the purpose of subsection 207.1(5) of the Income Tax Act (the "Act"). Subsection 207.1(5) of the Act imposes a tax on a Registered Retirement Savings Plan ("RRSP") or a Registered Retirement Income Fund ("RRIF") of 1% per month of the amount by which the fair market value, at the time of acquisition, of all "prescribed properties" held by the trust at the end of the month exceeds 50% of the fair market value, at the time of acquisition, of all properties held by the trust at the end of the month. The term "prescribed properties" is defined to mean property described in paragraphs 4900(6)(a), (b) or (c) of the Income Tax Regulations (the "Regulations") other than shares of a public corporation or properties which are not qualified investments for an RRSP or a RRSF.
Paragraph 4900(6)(a) of the Regulations provides that, for the purposes of subparagraphs 146 (1)(g)(iv) and 146.3(1)(d)(iii) of the Act, a property is a qualified investment for a trust governed by an RRSP or a RRIF if the property is a share of the capital stock of an "eligible corporation" within the meaning assigned by subsection 51OO(1) of the Regulations and the annuitant under the RRSP or the RRIF is not a "designated shareholder" of the corporation.
Pursuant to subparagraph 5100(1)(b) of the Regulations, an "eligible corporation" is defined to include a "prescribed venture capital
corporations described in section 6700 of the Regulations. However, pursuant to subparagraph 5100(1)(e) of the Regulations an "eligible corporation" does not include a venture capital corporation which is not so prescribed. Consequently a share of a venture capital corporation which is not prescribed would not be a "prescribed property" for purposes of subsection 207.l(5) of the Act.
As noted above, the annuitant of an RRSP or a RRIF must not be a "designated shareholder" of an otherwise eligible corporation in respect of that plan.
A "designated shareholder" of a corporation at any time is any person who, at that time
(a) is, or is related to, a person who separately or together with any other related persons holds 10% or more of the shares of any class of shares of the corporation, unless the cost amount of these shares is, in total, less than $25,000. For this purpose, an annuitant of an RRSP and the RRSP itself are considered to be related persons,
(b) is or is related to a member of a partnership that controls the corporation in any manner,
(c) is or is related to a beneficiary under a trust that controls the corporation in any manner,
(d) is or is related to an employee of the corporation where the employees control the corporation, except where the corporation is controlled directly or indirectly by one person or a related group of persons, or
(e) does not deal at arm's length with the corporation.
Due to the detail and complexity of the Regulations regarding these issues, the foregoing comments are meant only to provide an overview of the relevant provisions and under no circumstances are they to be considered to be either comprehensive or all inclusive. We trust, however, that they will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch