Thinking of acquiring or buying shares in a private company for future investments?
There are many eligible investments, such as shares of Canadian private corporations, that can be held in a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA). It's important to note that both RRIF and RRSP accounts are registered with the Canada Revenue Agency (CRA).
The current regulations provide that a TFSA, RRIF, or RRSP investments account may acquire and hold shares of a private Canadian corporation provided that the corporation meets the definition of 'specified small business corporation' and provided that the share is not a 'prohibited investment.'
Specified small business corporation definition
The term specified small business corporation (SSBC) is defined, generally, to mean a Canadian corporation that is not controlled by one or more non-resident persons and that has at least 90% of the fair market value of its assets used principally in an active business carried on primarily in Canada. These assets can include shares of connected Canadian corporations that themselves meet the 90% test. This criteria must be passed at all times while you are investing in an RRSP, RRIF, or TFSA account.
Prohibited investment
As noted above, an eligible share investment must also, at all times, not be a prohibited investment. This is defined, in general terms, to be a share of a company in which a particular Canadian RRSP, RRIF, or TFSA, either alone or together with non-arm’s length parties (including the annuitant of the RRSP, RRIF, or TFSA), owns 10% or more of any class of the issued shares of the particular company, or does not deal at arm’s length with the company.
Who's included in the non-arm’s length party?
Non-arm’s length parties include related persons. Related persons include individuals connected by a blood relationship, marriage, common-law partnership, or adoption. A blood relationship is referred to as being that of a parent and a child (or other descendants, such as a grandchild or a great-grandchild), or that of a brother and a sister.
'Child' includes a child of a spouse, and spouse of a child i.e. a step-child, spouse of a child or a step-child. Two persons are 'connected by marriage' if one person is married to the other person or to an individual who is connected by a blood relationship to that other person. For example, an individual will be connected by marriage to the parents and any siblings of the individual's spouse. An individual's niece, nephew, aunt, or uncle is not related by blood, marriage, common-law partnership, or adoption to the individual unless such person meets one of the other scenarios described above.
Non-arm’s length parties could also include unrelated persons. It is a question of fact whether unrelated persons are dealing with each other at arm’s length. Each situation must be evaluated in its own merits.
Seek the advice of a financial expert
As the rules surrounding this area are complex and each situation may be unique to an individual investor, it is imperative that investors who are interested in investing in Canadian private companies through an RRSP, RRIF, and TFSA seek their own professional advice.
Taxpayers sometimes have difficulties in complying with the prohibited investment regulations in Canada and falling out of compliance with the regulations can have serious repercussions, especially if corrective actions are not taken immediately. If there is a possibility that a specific investment or holding is, or might become a prohibited investment, taxpayers should communicate with a Crowe MacKay expert, available in Alberta, British Columbia, Northwest Territories and Yukon, as soon as possible.
Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article. Contact your Crowe MacKay advisor for more information.
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