2014-0518601M4 Non-qualified investments held in registered plans

Principal Issues: Was the tax treatment of a qualified investment held in a registered plan, that subsequently becomes a non-qualified investment correct?

Position: Yes.

Reasons: Legislation under subsection 207.04(1) and 207.04(2).

Author: Storr, Keely
Section: 204 "qualified investments"; subsections 162(7), 207.01(5), 207.04(1), 207.04(2), 207.06(2), and 207.07(1)

March 27, 2014

XXXXXXXXXX

Dear XXXXXXXXXX:

Thank you for your correspondence about the non-qualified investments held in your registered account. I apologize for the delay in replying.

Although you do not specify the account type, I believe you are referring to a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), or a tax-free savings account (TFSA). I will refer to these products as trusts governed by registered plans.

Trusts governed by registered plans must limit their investments to qualified investments. The Income Tax Act provides a list of investment categories that are acceptable as qualified investments. In general, securities (other than futures contracts or other derivative instruments in respect of which the holder’s risk of loss may exceed the holder’s cost) that are listed on a designated stock exchange are qualified investments for a trust governed by a registered plan. In our view, the term “securities” should be given a broad application and interpreted using the ordinary meaning of the term.

If a trust governed by a registered plan acquires a qualified investment that later becomes a non-qualified investment, the holder of the TFSA or the annuitant of the RRSP or RRIF will be subject to a tax equal to 50% of the fair market value of the investment at the point in time it becomes non-qualified. In this situation, the tax is refundable if the holder or annuitant disposes of the non‑qualified investment before the end of the next year or at any later time the Minister of National Revenue considers reasonable given the circumstances.

An RRSP or RRIF annuitant who is subject to this tax must file Form RC339, Individual Return for Certain Taxes for RRSPs or RRIFs for Tax Year 20__. A TFSA holder must file Form RC243, Tax-Free Savings Account (TFSA) Return. They must file these returns by June 30 of the next year. They must also pay any taxes owing by that date.

The rules outlined above apply to investments that become non-qualified after March 22, 2011, regardless of whether they were acquired before or after that date.

The Act also requires the issuer or carrier of a trust that is governed by a registered plan to exercise the care, diligence, and skill of a reasonably prudent person to minimize the possibility that the trust holds a non-qualified investment. If the issuer or carrier of a plan trust does not comply with this obligation, the issuer or carrier can be subject to a penalty.

The CRA is responsible for administering the tax system and applying current tax legislation. The Department of Finance Canada is responsible for developing tax policy and legislation. Any proposal to change legislation must be considered by the Minister of Finance and approved by Parliament. I am therefore sending a copy of our correspondence to the Honourable Joe Oliver, Minister of Finance, for his consideration.

I trust that the information I have provided is helpful.

Yours sincerely,

Kerry-Lynne D. Findlay, P.C., Q.C., M.P.
Minister of National Revenue

c.c.:  The Honourable Joe Oliver, P.C., M.P.
         Minister of Finance
         House of Commons
         Ottawa ON  K1A 0A6

Keely Storr
613-957-9769
2014-051860

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