Revenue Canada Taxation Head Office
B. G. Dodd (613) 995-0051
Dear Sirs:
We are writing in reply to your letter dated October 30, 1985 concerning qualified investments for deferred income plans.
You refer to a form of marketing employed in some public share offerings which involves the offering of common shares in the capital of a public corporation that is listed on a prescribed stock exchange, together with warrants, not as yet so listed, to acquire additional such shares. The warrants are not severable from the shares until some later time (at which point we understand the warrants themselves would be listed on a prescribed stock exchange and would begin to trade separately). A package or unit would thus, for example, consist of one common share and one warrant.
You further indicate that the warrant is not initially represented by a warrant certificate but rather by a "legend" on the certificate for the share being issued which contains an undertaking by the issuer to issue a negotiable warrant certificate to the person who, on the warrant record date, is the registered holder of the common share evidenced by the legended share certificate. The warrants are not exercisable until after the warrant record date. You request our views concerning the acquisition of such a unit by a registered retirement savings plan (RRSP).
It is the Department's opinion that, for the purposes of paragraph 146(l)(g) of the Income Tax Act, the acquisition of a unit described above would be:
- a qualified investment to the extent of the share acquired, such share being a share of the capital stock of a public corporation as described in regulation 4900(1)(b);
- a non-qualified investment to the extent of the right or warrant acquired, such right or warrant not being listed at the time of acquisition on a prescribed stock exchange in Canada as required by regulation 4900(l)(e).
The Department has taken the position that where the warrants are disposed of shortly after acquisition in the same calendar year and there is no significant difference between the fair market value of the warrants on acquisition and the proceeds of disposition, the provisions of subsections 146(6) and (10) will not be applied to the transactions.
You also enquire about an arrangement whereby the RRSP annuitant purchases the unit and then contributes or sells the common share component to his RRSP. This would entail delivery to the plan of the legended share certificate and would mean that the RRSP is the holder of record to receive the warrant when distributed. The annuitant, however, would as part of the transaction reserve the right to the warrant so that this right and the warrant, when issued, would be held in trust by the plan for the annuitant. Our initial reaction is that this might not solve the problem. As holder of the legended share certificate, the plan could be viewed as nevertheless having acquired a right, in the form of the legend, which is not a qualified investment. There is also the possibility that this might represent a gift to the plan with the resultant Part X.1 implications. In any event, it would perhaps be more appropriate for the annuitant to purchase the "unit", and make the contribution or sale to the RRSP later once the warrants become listed. The Department's policy regarding non-application of subsections 146(6) and (10) of the Act in the circumstances described in the preceding paragraph should also be considered in this regard.
We trust the foregoing will be of assistance.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch