If an RRSP (or registered retirement income fund (RRIF)) acquires a prohibited investment or if an existing investment becomes prohibited, the RRSP annuitant will be subject to a tax equal to 50% of the fair market value of the investment, under subsection 207.04(1). Further, any income or capital gain attributable to a prohibited investment is treated as an advantage and is subject to a 100% tax under section 207.05. Other types of transactions, including transactions that artificially shift value into or out of an RRSP, will be subject to the advantage tax.
The CRA can cancel or waive all or part of the prohibited investment and advantage taxes in certain circumstances under subsection 207.06(2) of the Act, taking into account factors such as reasonable error and whether the transaction or series of transactions that gave rise to the tax also resulted in another tax being payable under the Act. In the case of waived advantage tax, the annuitant must withdraw an amount from their RRSP or RRIF without delay equal to the amount of the tax being waived, under subsection 207.06(3) of the Act.
Question 9 - RRSP prohibited investments and warrants
An RRSP holds shares of a particular corporation. These shares are "prohibited investments" for the RRSP, as defined by subsection 207.01(1) of the Act. These shares were acquired by the RRSP before March 23, 2011. The RRSP also holds warrants that entitle the RRSP to acquire additional shares of this corporation. These warrants were acquired by the RRSP before March 23, 2011.
After March 22, 2011, the RRSP exercises these warrants and acquires more shares of the corporation. The shares acquired by exercising the warrants are prohibited investments.
Question: Will the tax payable on prohibited investments under subsection 207.04(1) apply to the shares acquired after March 22, 2011 on the exercise of the warrants, even though the warrants were acquired before March 23, 2011?
The CRA says that, where an RRSP or an RRIF acquires a prohibited investment or if an existing investment becomes prohibited, the RRSP or RRIF annuitant is subject to a tax equal to 50% of the fair market value of the investment under subsections 207.04(1) and (2). The tax applies only to RRSP and RRIF investments acquired after March 22, 2011, subject to certain exceptions.
The CRA notes that, when an RRSP or RRIF exercises a warrant and purchases additional shares of the issuing corporation, the RRSP or RRIF trust is considered to have acquired those shares. As a result, if the shares are a prohibited investment for the RRSP or RRIF and the acquisition of the shares occurs after March 22, 2011, the 50% tax on prohibited investments will apply, based on the fair market value of the shares at the time of acquisition. Although the tax did not apply to the warrants, because they were acquired before March 23, 2011, the CRA said this is irrelevant. Further, the same result would apply in the context of options, convertible securities and other exchanges of securities.
For more information, contact your KPMG adviser.
Information is current to February 26, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500