| 5-922239 | |
| 19(1) | P. Spice |
| (613) 957-8953 |
September 1, 1992
Dear 19(1)
This is in reply to your letter of July 20, 1992, in which you ask whether you are a "designated shareholder" of 24(1) Since this is a question of fact and we are not aware of all the pertinent facts, we are unable to answer your query. We will provide some general comments on the applicable law, however.
You refer to the provisions in the Income Tax Act (the "Act") respecting registered retirement savings plans (RRSP's) investments in shares of a Canadian-controlled private corporation. In order for such shares to be qualified investments for an RRSP, they must meet the requirements contained in sections 4901 through 5103 of the Income Tax Act Regulations (the "Regulations").
As you note, the annuitant of an RRSP must not be a "designated shareholder" of the corporation. This term is defined in subsection 4901(2) of the Regulations and includes a person who is, or is related to, a "specified shareholder" as defined in subsection 248(1) of the Act or a person who would be a "specified shareholder" if that person's rights to acquire the shares were taken into account. 24(1) please note that you must take into account shares owned by a related person who is a "specified shareholder" and any rights or options you may have to acquire shares in the corporation, if one of the main reasons for the existence of the rights is so that you are not considered to be a "specified shareholder". You must also take into account shares owned by you "indirectly", such as through a partnership, trust or other corporation. If you are a "specified shareholder" of the corporation, you will not be considered a "designated shareholder" if the cost amount of your shares or rights to shares in the corporation or a related corporation is less than $25,000.
A "designated shareholder" also includes a person who
(a) is, or is related to, a member of a partnership that controls the corporation in any manner,
(b) is, or is related to, a beneficiary under a trust that controls the corporation in any manner,
(c) 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
(d) does not deal at arm's length with the corporation.
From the facts provided in your letter, it appears that none of the situations described in (a) through (c) apply. With respect to (d) above, paragraph 251(2)(b) of the Act defines when corporations and persons are "related" and thus defines those who are deemed by subsection 251(1) of the Act not to be dealing at arm's length. 24(1) but you must also determine whether you are related to persons who "control" the corporation. "Control" is given an extended meaning in subsection 251(5) of the Act and the meaning of the word is discussed in Interpretation Bulletin IT-64R3, a copy of which is enclosed for your information. See in particular paragraphs 13 through 19.
The foregoing information may help you to determine whether you are "deemed" not to be dealing at arm's length with the corporation. It is still a question of fact whether you otherwise do not deal at arm's length with the corporation.
24(1)
Enclosed is Interpretation Bulletin IT-419 and the Special Release thereto which will provide you with information concerning the meaning of "arm's length". See paragraphs 6 through 14, 19 and 20 in particular.
We are sorry we cannot provide a definitive answer to your question, but hope this information will be of assistance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate