17 April 1998 External T.I. E9728855 - QSBCS - SHARES HELD IN RRSP.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the time that an individual holds shares in his or her RRSP would be counted as part of the 24-month holding requirement in the definition of "qualified small business corporation shares."

Position:

Yes, if the RRSP trust meets the definition of "personal trust."

Reasons:

Subparagraph 110.6(14)(1)(c)(i) deems a "personal trust" to be related to an individual throughout the time during which the individual is a beneficiary of the trust.

XXXXXXXXXX J. Gibbons
5-972885

Attention XXXXXXXXXX

April 17, 1998

Dear XXXXXXXXXX:

We are replying to your letter of October 28, 1998, in which you inquire whether the time that an individual holds shares in his or her registered retirement savings plan (“RRSP”) would be counted as part of the 24-month holding requirement in the definition of “qualified small business corporation shares” (“QSBC shares”) in subsection 110.6(1) of the Income Tax Act (the “Act”). We apologize for the delay in replying. We have assumed that the RRSP is a trust. In your letter, you also raise several questions regarding the implications of a possible exchange of shares between an individual and his or her RRSP.

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. The following comments are, therefore, of a general nature only.

To qualify as QSBC shares according to the definition in subsection 110.6(1) of the Act, shares must not be held throughout the 24 months immediately preceding the determination time by anyone other than the individual or a person or partnership related to the individual. An RRSP trust is considered a “person” since subsection 104(2) of the Act deems a trust to be an individual for purposes of the Act. Alternatively, an RRSP trust is considered a “person” since the definition of “person” in subsection 248(1) of the Act states that it includes an entity exempt from tax under subsection 149(1) of the Act, and an RRSP trust is exempt under paragraph 149(1)(r) of the Act.

Subparagraph 110.6(14)(1)(c)(i) of the Act deems a “personal trust” to be related to, in this case, the individual throughout the time during which the individual was a beneficiary of the trust. A personal trust is defined in subsection 248(1) of the Act and includes an inter vivos trust in which no beneficial interest was acquired for consideration. Accordingly, where shares are held inside an individual’s RRSP trust, they will be considered to be held by a person related to the individual for purposes of the definition of QSBC shares in subsection 110.6(1) of the Act if the RRSP trust meets the definition of personal trust.

In regard to your second question regarding the tax implications of exchanging non-qualifying shares held outside an RRSP for qualifying shares held inside an RRSP, we cannot provide specific comments since your query is very general in nature. The determination of the proper income tax consequences relating to any transaction between an annuitant and the annuitant's RRSP will depend on an analysis of all the facts, documentation and other information pertaining to the particular situation in relation to the requirements of the Income Tax Act (the "Act"). However, we can provide you with the following general comments.

Generally, transactions between an annuitant and his or her RRSP trust are subject to subsections 69(1) and 146(9) of the Act. Paragraph 69(1)(a) of the Act deems property acquired from a non-arm’s length person for consideration in excess of fair market value to be acquired at fair market value, and paragraph 69(1)(b) of the Act deems property disposed of to a non-arm’s length person for proceeds less than fair market value to be disposed of at fair market value. In addition, where an RRSP trust disposes of property for a consideration less than fair market value of the property or acquires property for a consideration greater than the fair market value, the difference between the fair market value and the consideration is income of the annuitant in the year pursuant to subsection 146(9) of the Act.

The fair market value of the properties being exchanged would be only one of the factors to consider in determining the nature of the transactions. Such an exchange may represent a purchase and sale of property, or a "premium" paid by the annuitant to his RRSP and a "benefit" received from his RRSP (see definition of "premium" and "benefit" in subsection 146(1) of the Act). Where the exchange represents a bona-fide purchase and sale of property, the RRSP trustee would not be required to issue a T4RSP reporting slip. However, where the exchange does in fact represent a "premium" paid to the RRSP and a "benefit" received from the RRSP the tax treatment of these amounts will be based on the rules in section 146 of the Act, and, in the case of a trust, a T4RSP reporting slip would be required (see IT-124R6). Subject to the exception described below, where an annuitant transfers property to his RRSP, either as a sale or as a premium paid to his RRSP, the annuitant will have a disposition of the property so transferred at that time for fair market value and a gain or loss may occur. If the annuitant incurs a capital loss on the disposition subparagraph 40(2)(g)(iv) of the Act will deem this loss to be nil, and no amount of the denied loss would be added to the "cost amount" of the property transferred to the RRSP trust.

We trust that these comments will be of assistance.

Yours truly,

P. Spice
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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