2014-0529681E5 Non-qualified investments acquired by RRSP Trust

Principal Issues: Whether subsection 146(10.1) and/or 207.04 of the Act would apply in two scenarios. In the first scenario, an RRSP trust holds shares of a corporation that are non-qualified investments and a stock dividend is paid on those shares; in the second scenario, an RRSP trust holds shares of a corporation that are qualified investments, and the corporation pays a dividend in-kind on those shares by distributing to the RRSP trust shares of another corporation that are not qualified investments.

Position: In both scenarios, the RRSP annuitant will be liable to pay the 50% tax under subsection 207.04(1) of the Act, subject to a possible refund of the tax pursuant to subsection 207.04(4). In the first scenario, subsection 146(10.1) of the Act will subject the RRSP trust to Part I tax on the income resulting from the stock dividend (i.e. this is income from a non-qualified investment). In the second scenario, the RRSP trust will not be subject to Part I tax on the income resulting from the in-kind dividend; however, subsection 146(10.1) of the Act will apply to the RRSP trust in respect of any income earned on the non-qualified shares received as an in-kind dividend.

Reasons: In both scenarios, the RRSP trust has acquired a non-qualified investment. In the first scenario, the non-qualified investment was received as income from a non-qualified investment. In the second scenario, the non-qualified investment was received as income from a qualified investment, thus subsection 146(10.1) of the Act does not apply.

Author: Ward, Jason
Section: ITA 146(10.1), 207.04

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                                                                                                                                                                2014-052968
                                                                                                                                                                Jason R. Ward

December 4, 2014

Dear XXXXXXXXXX:

Re:  Non-Qualified Investment Acquired by a Registered Retirement Savings Plan

This letter is in reply to your correspondence of March 31, 2014 and April 30, 2014, wherein you requested clarification of the tax implications where a trust governed by a registered retirement savings plan (RRSP) acquires a non-qualified investment in each of the following two scenarios:

1.    The RRSP trust holds shares of the capital stock of a corporation (“Company A”) that constitute a non-qualified investment for the trust.  Company A pays a stock dividend, such that the trust receives additional shares of the same class of Company A.

2.    The RRSP trust holds shares of the capital stock of a corporation (“Company X”) that constitute a qualified investment for the trust.  Company X distributes as a dividend in kind the shares of the capital stock of another corporation (“Company Y”) that constitute a non-qualified investment for the trust.

In particular, you have asked whether subsection 146(10.1) and/or subsection 207.04(1) of the Income Tax Act (“the Act”) would apply in either scenario.  You have also asked for our comments on the tax implications where, in Scenario 2, the RRSP trust subsequently receives cash dividends from the shares that it holds in Company Y.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R6 Advance Income Tax Rulings and Technical Interpretations.

Subsection 146(10.1) of the Act provides for the payment of Part I tax by an RRSP trust that holds, at any time in a taxation year, a property that is not a qualified investment.  Income tax is payable on a notional taxable income which is calculated using only the income or loss from the non-qualified investment and the capital gain or capital loss from the disposition of the non-qualified investment. 

Furthermore, if an RRSP trust acquires a non-qualified investment after March 22, 2011, subsections 207.04(1) and (2) of the Act provide that the annuitant of the RRSP is subject to a tax equal to 50% of the fair market value of the investment.  This tax may be refundable in certain circumstances, in accordance with subsection 207.04(4) of the Act, provided that the non-qualified investment is disposed by the RRSP trust before the end of the calendar year following the calendar year in which the tax arose (or such later time as is permitted by the Minister of National Revenue).  However, the holder will not be entitled to this refund where it is reasonable to consider that the holder knew or ought to have known, at the time the property was acquired that the property was or would become a non-qualified investment.  An RRSP annuitant subject to this tax is required to file Form RC339, Individual Return for Certain Taxes for RRSPs or RRIFs for Tax Year 20__ no later than June 30 of the following year, and any tax owing must also be paid by that date.  Form RC339 provides instructions on how to claim a refund, if applicable.

In Scenario 1, because the shares of Company A are non-qualified investments, the RRSP trust will be subject to Part I tax pursuant to subsection 146(10.1) of the Act in respect of its income from the stock dividends paid by those shares.  In addition, the annuitant of the RRSP will be liable for the tax payable on non-qualified investments imposed under subsection 207.04(1) of the Act; pursuant to subsection 207.04(2) of the Act, the amount of the tax payable is equal to 50% of the fair market value of the additional Company A shares at the time they are received by the RRSP trust as a stock dividend.  Whether the annuitant is entitled to a refund of this tax in accordance with subsection 207.04(4) of the Act is a question of fact that depends on the particular circumstances.

In Scenario 2, the annuitant of the RRSP will be liable to pay the 50% tax payable under subsection 207.04(1) of the Act – subject to a possible refund of the tax pursuant to subsection 207.04(4) of the Act – as a result of the RRSP trust’s acquisition of the non-qualified Company Y shares.  Because the shares of Company X are qualified investments, the RRSP trust will not be required to pay Part I tax under subsection 146(10.1) of the Act in respect of its income from the in-kind dividend of Company Y shares; however, if cash dividends are subsequently received by the RRSP trust from the Company Y shares that it holds, the RRSP trust will be subject to Part I tax under subsection 146(10.1) of the Act on this income. Please note that the Act also requires the issuer of an RRSP 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 of an RRSP trust does not comply with this obligation, the issuer can be subject to a penalty.

We trust that our comments will be of assistance.

Yours truly,

Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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