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A MIC’s Specified Shareholder, Related Parties and Prohibited RRSP Investment Rules

The Question being asked is a brother or sister of a shareholder of a mortgage investment corporation (MIC) a specified shareholder (To qualify as a MIC for purposes of the Act, a corporation must, throughout the taxation year, meet the conditions in subsection 130.1(6) of the Act. Paragraph 130.1(6)(d) of the Act requires that the number of shareholders of the corporation be not less than 20 and that no one shareholder hold, directly or indirectly, more than 25% of the issued shares of any class of the capital stock of the corporation. However, subsection 130.1(8) of the Act provides an exception which deems the corporation to have complied with paragraph 130.1(6)(d) of the Act throughout the first taxation year in which it carries on business if the test in paragraph 130.1(6)(d) of the Act is met on the last day of its first taxation year.) for purposes of the definition of MIC in 130.1(6)? For purposes of determining if an RRSP annuitant has a significant interest in an investment, for purposes of the RRSP prohibited investment rules, is, for example, the annuitant’s brother or sister a specified shareholder?

Under the Canadian Income Tax Act, subparagraph 130.1(6)(d)(iv) modifies the meaning of “related persons” for purposes of the meaning of “specified shareholder” used in paragraph 130.1(6)(d). The definition of “specified shareholder” in 248(1) which is used in determining “significant interest” for purposes of the RRSP prohibited investment rules will include the brother or sister of the RRSP annuitant.

 

Hence, for purposes of the MIC definition, a specified shareholder will include the shareholder’s brother or sister. Hence, for purposes of the definition of “prohibited investment” that applies to RRSPs, and whether an RRSP annuitant has a significant interest in a corporation, whether a specified shareholder will include a brother or sister of the RRSP annuitant.

Subsection 130.1(6) describes the conditions that must be satisfied for a corporation to be a MIC for purposes of the Act. Subparagraph 130.1(6)(d)(iv) amends the definition of “related persons” in paragraph 251(2)(a), for purposes of paragraph 130.1(6)(d), such that a related person means an individual and:

  • the individual’s child, as defined in subsection 70(10), who is under 18, or
  • the individual’s spouse or common-law partner.

Accordingly, related persons for purposes of subparagraph 130.1(6)(d)(ii) and the meaning of “specified shareholder” as modified in paragraph 130.1(6)(d), will only include, in general, an individual’s minor child, spouse, or common-law partner and not an individual’s brother or sister.

However, paragraph 4900(1)(c) of the Income Tax Regulations (the “Regulations”) permits a share of a MIC to be a qualified investment for an RRSP provided the MIC does not hold as part of its property any indebtedness of a person who is a connected person under the RRSP. And subsection 4901(2) of the Regulations defines a “connected person” and includes the annuitant of an RRSP or any person who does not deal at arm’s length with the annuitant.  Subsection 207.01(1) of the Canadian Income Tax Act, defines the term “prohibited investment” for an RRSP and prohibits closely-held investments, in relation to the RRSP annuitant, from being held by an RRSP. Such that an investment will be a prohibited investment where the RRSP annuitant has a “significant interest” in the investment. For the purpose of determining whether an RRSP annuitant has a significant interest, an interest in the investment held by a person not dealing at arm’s length with the RRSP annuitant is also taken into account.  Therefore, in accordance with subsection 207.01(4) of the Canadian Income Tax Act, an individual has a significant interest in a corporation at any time if the individual is a specified shareholder of the corporation at that time. In general, subsection 248(1) of the Canadian Income Tax Act defines a “specified shareholder” as a taxpayer, including a person with whom the taxpayer does not deal at arm’s length, who owns, directly or indirectly, at any time in the year, not less than 10% of the issued shares of any class of capital stock of the corporation or any other corporation that is related to the corporation. Consequently, if the annuitant, and persons not dealing at arm’s length with the annuitant, of the RRSP, individually or together own directly or indirectly 10% or more of any class of shares of the MIC, the investment in the MIC will be considered a prohibited investment for the RRSP. For purposes of the above, and pursuant to the definitions of “arm’s length”, “related persons” and “blood relationship” in section 251 of the Canadian Income Tax Act, an annuitant and a brother or sister of the annuitant are persons who do not deal with each other at arm’s length.

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