Revenue Canada Taxation Head Office
Peter K. Noack (613)957-8953
April 22, 1987
Dear Sirs:
Re: Qualified Investments for RRSP's Your File No. 03217/00010
We reply to your letter of March 5 concerning the interpretation of the definition of "designated shareholder" in subsection 4901(2) of the Regulations to the Income Tax Act (Regulations) in the following circumstances:
1. Corporation X is an "eligible corporation" within the meaning assigned by subsection 5100(1) of the Regulations.
2. Corporation X has issued 55,000 shares to nine shareholders and its issued share capital is held as follows:
(a) four shareholders each own 12,500 shares, which in the aggregate represent approximately 91% of the issued capital; and
(b) the remaining five shareholders each own 1,000 shares, each representing 1.8%.
3. The group of four shareholders holding approximately 91% of the issued capital (the "Control Group") also have an agreement amongst themselves pursuant to which they have agreed to vote on certain issues in concert. None of the other shareholders (the "Non-Control Group") is a party to this agreement.
4. Three of four shareholders in the Control Group are senior employees of Corporation X (e.g., President, Vice-President). One is a former employee of Corporation X.
5. All members of the Non-Control Group are employees of Corporation X and hold less senior positions (e.g., Comptroller).
6. With one exception, all members of the Control Group and the Non-Control Group are not "related persons" as defined in section 251 of the Income Tax Act and the members of the Non-Control Group deal with each other and with Corporation X at arm's-length. One member of the Non-Control Group is the son of one member of the Control Group.
7. One of the "unrelated" employees in the Non-Control Group ("the Transferor") wishes to transfer a portion (390 shares) of his 1,000 shares to a trust governed by a registered retirement savings plan of which he is the annuitant ("the RRSP"). The Transferor will receive consideration from the RRSP equal to the fair market value of the shares.
8. The purpose of the transaction described in 7. above is not to cause any amount received in respect of the transferred shares to be on account, in lieu, or in satisfaction of payment for services rendered by the Transferor to Corporation X, as contemplated by subsection 4900(8) of the Regulations.
Paragraph 4900(6)(a) of the Regulations states that the annuitant must not be a "designated shareholder" as defined in subsection 4901(2) of the Regulations. You are concerned about the characterization of the Transferor as a "designated shareholder" because he is an employee of Corporation X which no one person or related group controls. It is your view, however, that such a determination would restrict the application of these new provisions.
You ask us to determine that the Transferor is not a "designated shareholder" in these circumstances so that employees who are not members of the Controlling Group are permitted to transfer their shares to trusts governed by a registered retirement savings plan of which they or their spouses are annuitants.
In the above circumstances, a group of unrelated employees of Corporation X controls the corporation. The group does not include a person or a related group that controls the corporation directly or indirectly in any manner whatever. Therefore, the Transferor by reason of being an employee of Corporation X is a "designated shareholder" for the purpose of Part 4900 of the Regulations. In view of the specific requirements in paragraph (d) of the definition "designated shareholder" in subsection 4901(2) of the Regulations, we cannot determine otherwise.
Our Current Amendments and Regulations Division has confirmed strict application of the wording in paragraph (d) of the definition "designated shareholder".
You may wish to direct any submission for a change of the Regulations directly to the Department of Finance.
Yours truly,
for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch