5-911624
Dear Sir:
Re: Qualifying Investments for Registered Retirement Savings Plans
This is in reply to your letter of May 27, 1991, wherein you requested our opinion with respect to qualified investments for Registered Retirement Savings Plans ("RRSP").
Generally an RRSP can invest in the shares of a Canadian Controlled Private Corporation (CCPC) if it is an "eligible corporation" and the annuitant of the RRSP is not a "designated shareholder" of that company. These latter two terms are defined terms and their meanings are provided in sections 4900 through 5103 of the Income Tax Regulations (the "Regulations").
In brief, an "eligible corporation" is generally a taxable Canadian corporation which uses substantially all of its property in a "qualifying active business". Specifically excluded from this definition are securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt, and non-resident controlled corporations.
A "qualifying active business" is also a defined term which generally includes any business which is carried on in Canada except one where its principal purpose is to earn income from property in the form of interest, dividends, rent, royalties or gains from dispositions of property. A qualifying business may, however, include a business of leasing property other than real property, and a retail or wholesale business.
A corporation's business will be considered to have been carried on in Canada if at least 50% of its employees are engaged in the business in Canada or at least 50% of its salaries or wages are paid for services provided in Canada in respect of the business. If the corporation is part of a group of related corporations, the combined services of their employees and the combined salaries and wages paid must bc considered in making this determination.
A "designated shareholder" of a corporation is any person who
(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 those 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 by one person or a related group of persons, or
(e) is not at arm's length with the corporation.
It should also be noted that pursuant to subsection 207.1(5) of the Income Tax Act, an RRSP that holds small business holdings with a fair market value, at the time of acquisition, of all properties of the RRSP, will be subject to a tax of l% per month on the excess amount.
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.
The above comments are an expression of opinion only and do not bind the Department.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate