New Penalty Taxes: Prohibited Investments And Advantage Rules For RRSP, RRIF And RCA Deferred Income Plans

Recent amendments to the Income Tax Act (Canada) have extended the penalty taxes that were initially aimed at TFSAs, to situations where you hold certain types and/or percentages of assets through RRSP, RRIF and RCA tax deferred plans or access certain advantages in connection with such plans. Take a look at the following to see if these changes will affect you.

Step One

1. Do you own 10% or more of any class of shares issued by any corporation (private or public)?

2. Do one or more persons not dealing at arm's length with you own 10% or more of any class of shares issued by any corporation (private or public)?

3. Does the collective group described in 1 and 2 own 10% or more of any class of shares issued by any corporation (private or public)?

4. Do you, alone or together with any non-arm's length person, own:

   (a) 10% of more of the fair market value ("FMV") of any partnership; or

   (b) 10% or more of the FMV of any trust?

   If you answered yes to any of 1 through 4 then you have a "Significant Interest" in the relevant entity.

5. Does your plan hold any debt owed by you?

6. Does your plan own any shares that when acquired were qualified investments as shares in:

   (a) a specified small business corporation;

   (b) a venture capital corporation; or

   (c) a specified co-operative corporation?

   If you answered yes to any of the Step One questions, then you need to look at the Prohibited Investment Rules!

   Prohibited Investment Rules

   The following are Prohibited Investments when held in a relevant plan:

1. debt of a plan holder/annuitant/RCA beneficiary (referred to herein as a "Relevant Person")1;

2. (subject to certain exemptions for demonstrably portfolio-style investments) investments or interests (including options) in entities: (a) where the Relevant Person has a Significant Interest; or (b) which do not deal at arm's length with either the Relevant Person or with an entity where the Relevant Person has a Significant Interest [See items 1-4 above]; and

3. certain prescribed property that was a qualified investment at the time of acquisition by the plan but which ceases to qualify as: (a) a share of a "specified small business corporation"; (b) a share of a "venture capital corporation", or (c) a qualifying share of a "specified cooperative corporation".

   Step Two

   Did you, or anyone not dealing at arm's length with you enjoy any advantage related to the existence of the plan (other than by taxable withdrawal), including:

   i) accessing any benefits or...