| 19(1) | 5-901478 |
| Maureen Shea-DesRosierss | |
| (613) 957-3494 | |
| August 23, 1990 | EACC9273 |
Dear Sir:
Re: Qualified investment for a trust governed by a Registered Retirement Savings Plan ("RRSP")
This is in reply to your letter of June 20, 1990 wherein you requested our opinion as to whether a limited partnership would constitute a qualified investment for a trust governed by a RRSP.
As noted in Information Circular 70-6R, we do not give opinions in respect of proposed transactions other than as a reply to an advance income tax ruling request. However, we will offer the following general comments.
A property is a qualified investment for a trust governed by an RRSP if at that time the property is an interest of a limited partner in a small business investment limited partnership. This latter term is defined at subsection 5102(1) of the Income Tax Regulations (the "Regulations").
A "small business investment limited partnership" ("SBILP") is a particular type of limited partnership. Its investments must consist solely of small business securities and properties described in subparagraphs 204(e)(i), (ii), (vii) and (viii) of the Income Tax Act (the "Act"). They consist of:
1. money that is legal tender in Canada and deposits of such money standing to the credit of the trust,
2. bonds, debentures, notes or similar obligations of a corporation the shares of which are listed on a prescribed stock exchange in Canada,
3. guaranteed investment certificates issued by a trust company incorporated under the laws of Canada or of a province,
4. investment contracts providing for the payment to or to the credit of the holder thereof of a fixed or determinable amount at maturity and issued by a corporation approved by the Governor in Council.
The SBILP must be the first owner of the small business security except where it acquires common shares of an eligible corporation from an officer or an employee of the eligible corporation. Paragraph 5102(1)(e) of the Regulations limits the interest of a limited partner, or a non-arm's length group of limited partners, to 30% of the units of the limited partnership. Subsection 5102(2) of the Regulations limits the distribution of small business securities by the partnership to the partners.
A "small business security" is defined at subsection 5100(2) of the Regulations. It includes shares and certain subordinated debt obligations and rights or options to obtain such shares or debt of eligible corporations. In order to qualify as a small business security of a particular taxpayer, that taxpayer must not hold shares, debt, rights and options in an eligible corporation and corporations associated therewith with aggregate cost amounts in excess of $10,000,000 and the total assets of the eligible corporations and associated corporations must not exceed $35,000,000.
In brief, an "eligible corporation" (subsection 5100(1) of the Regulations) 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 (subsection 5100(1) of the Regulations) which includes any business which is carried on in Canada except one whose 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.
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 Department does not provide copies of the provisions of the Act or its Regulations but these may be acquired through any Canadian Government Publishing Centre. A number of publishers also provide consolidated versions of the Act and Regulations which are generally available through local business libraries. You may also find useful, an article by Michael P. Redden: "Investment in Small Business through Registered Retirement Savings Plans", Canadian Tax Journal, Vol. 36, No. 4, July-August 1988, Page 992.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate