| 19(1) | File No. 5-9837 |
| A.B. Adler | |
| (613) 957-8962 |
April 19, 1990
Dear Sirs:
This is in reply to your letter dated March 21, 1990 in which you requested our views concerning the eligibility of certain investments as investments in registered retirement savings plans ("RRSP") or registered retirement income funds ("RRIF").
Our comments follow.
In our view, entering into a "spread", such as simultaneously writing a naked call option with a higher exercise price against a call option with a higher exercise price against a call option purchased by the RRSP, is not subject to the rules governing qualified investments for an RRSP or RRIF. We consider that entering into a "spread" would be indicative of the RRSP or RRIF carrying on a business within the provisions of subsection 146(4) or 146.3(3) of the Income Tax Act ("Act"), as the case may be, regardless of whether or not both options are exercised simultaneously. The reason for this is that we view the writing of a naked call option by such plans to be substantially similar to a short sale of shares. Our position is that short sales are indicative that such plans are carrying on business for the purposes of subsection 146(4) or 146.3(3) of the Act. In our opinion this is a logical approach since, in these circumstances, the subsequent purchase to cover the short sale is not for portfolio purposes but only to conclude the sale.
Where a "spread" is closed out prior to the exercise date of the call options, that is without acquiring and selling the respective shares, any income or loss produced thereby is income or loss from trading and not derived from holding a portfolio of qualified investments. Whether a plan which trades in this manner is carrying on a business can only be determined by an examination of all the relevant facts, but a single such transaction could produce that result. There is always the possibility that a RRSP or a RRIF which trades its options which are qualified investments may be held to be carrying on business as the volume of transactions increases. However, in such a situation there is, at least in theory, the prospect of the RRSP or RRIF exercising an option and holding the shares as investments. In the case of a "spread" this is an unlikely result since the two elements of the transaction are closed out together.
Generally, the acquisition of a warrant or call option that is listed on the Toronto Futures Exchange in Canada, giving an RRSP or RRIF the right investments, will be a qualified investment for an RRSP or RRIF solely by reason of paragraph 4900(1)(e) of the Income Tax Regulations.
We suggest that you consider making a request for an advance income tax ruling concerning the use of warrants to cover a short call position.
We trust that our comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate