2014-0545041E5 Registered plans - Excluded property

Principal Issues: The application of subparagraph (c)(iii) of the definition "excluded property" in subsection 207.01(1) in circumstances where the investment entity is a corporation.

Position: It is a question of fact as to whether the test in subparagraph (c)(iii) of the definition “excluded property” is satisfied in any given circumstance. The phrase “the governance of the investment entity”, which is used in that subparagraph, should, in our view, be given a wide meaning in the context of that subparagraph.

Reasons: The legislation

Author: Pietrow, Victor
Section: 207.01 (1) "excluded property"

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                                                                                                                                                         2014-054504
                                                                                                                                                          Victor Pietrow

November 26, 2014

Dear XXXXXXXXXX:

Re: Definition of “excluded property” in subsection 207.01(1) of the Income Tax Act

We are writing in response to your letter dated September 5, 2014 in connection with subparagraph (c)(iii) of the definition “excluded property” in subsection 207.01(1) of the Income Tax Act (Canada) (the “Act”).

This technical interpretation provides comments about the provisions of the Act and related legislation (where referenced). 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 submitted in the manner set out in Information Circular 70-6R6, “Advance Income Tax Rulings and Technical Interpretations”, dated August 29, 2014.  

Paragraph (c) of the “excluded property” definition provides that equity of a corporation, partnership or trust (referred to in paragraph (c) as the “investment entity”) will be excluded property of a trust governed by a registered plan if the conditions in subparagraphs (i) to (vii) are satisfied. The condition in subparagraph (iii) is as follows:

(iii) the controlling individual, either alone or together with persons with whom the controlling individual does not deal at arm’s length, does not have the right to cast at least 10% of the votes, if any, that could be cast regarding the governance of the investment entity.

Your query relates to a scenario where the investment entity is a corporation.  You have asked for our views as to whether subparagraph (c)(iii) of the “excluded property” definition would be satisfied in relation to shares of the capital stock of a corporation that are owned by a trust governed by a registered plan.  We understand that your scenario is as follows:

*     The controlling individual of the trust owns 2% of the shares of the corporation.  The trust also owns shares of the corporation.  The individual and the trust own, in total, no more than 10% of the shares of the corporation. The corporation has one single class of issued share capital.

*     The conditions in paragraph (c) – read without reference to subparagraph (iii) – of the definition “excluded property” in subsection 207.01(1) are satisfied.

*     The individual is one of five directors of the corporation and thereby has 20% of the votes that could be cast at any meeting of the directors of the corporation.

*     There is no unanimous shareholder agreement or other voting agreement in respect of the corporation.

*     Other than the trust, no one who does not deal at arm’s length with the individual owns shares of the corporation or has any voting rights in respect of meetings of the shareholders or directors of the corporation.

It is a question of fact as to whether the condition in subparagraph (c)(iii) of the definition “excluded property” in subsection 207.01(1) of the Act is satisfied in any given circumstance.  The phrase “the governance of the investment entity”, in our view, is to be given a wide meaning in the context of that subparagraph.  For example, where the investment entity is a corporation, the condition in subparagraph (c)(iii) might not be satisfied either because of the votes that could be cast at a general meeting of the shareholders or because of the votes that could be cast at a meeting of the board of directors.

In our view, based on the limited information provided in your letter, the controlling individual of the registered plan referred to in your scenario as summarized above has the right to cast at least 10% of the votes that could be cast regarding the governance of the corporation and, therefore, subparagraph (c)(iii) of the “excluded property” definition would not be satisfied.

We trust that the above comments will be of assistance.

Yours truly,

Lita Krantz, CPA, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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