Canada: Last Call: Do You Have Any Private Corporation Shares In Your RRSP?

Last Updated: September 20 2012
Article by Carolyne Corbeil

The 2011 federal budget, which was tabled June 6, 2011 (after the defeated March 23, 2011 budget), proposed various broad anti-avoidance tax measures to counter the implementation of tax planning strategies involving investments in registered retirement savings plans ("RRSP")1. One such anti-avoidance measure targets the shares of certain private corporations held in an RRSP after March 22, 2011. Such shares could now be considered as a "prohibited investment"2 with the result that the RRSP holder will be subject to severe special tax consequences. With proper planning before the end of 2012, the effects of that special tax could be alleviated.


As a general rule, an individual who deals at arm's length with a particular small business corporation ("SBC") and who, alone or with non-arm's length persons, owns less than 10% of the shares of any class of the capital stock of that SBC, may hold the shares of that SBC in his RRSP. In that respect, an SBC is a Canadian-controlled private corporation, all or substantially all of whose assets are used primarily in an active business carried on in Canada or are shares or debts of related SBCs.

Before March 23, 2011, an exception to the above rule provided that an individual who, alone or with non-arm's length persons, owned 10% or more of the shares in a class of the capital stock of an SBC or of a related corporation, could nevertheless hold the SBC's shares in his RRSP if the following conditions were satisfied:

  1. At the particular time that the RRSP acquired the investments, the RRSP holder, alone or with non-arm's length persons, dealt at arm's length with the SBC; and
  2. At that particular time, the RRSP holder, alone or with non-arm's length persons, owned shares in the capital stock of the SBC or of a related corporation, the total cost of which shares was less than $25,000.

This exception provided that the applicable conditions had to be satisfied at the time that the RRSP acquired the investments, with the result that all subsequent variations in the value of the shares did not affect the "qualified investment" status of the SBC's shares.


Effective March 23, 2011, the rule remains unchanged, but the exception is no longer available. Thus, investments in the shares of an SBC in which the RRSP holder, alone or with non-arm's length persons, holds 10% or more of the shares of a class of the capital stock of that corporation or of a related corporation, at a particular time, are now prohibited investments3.

Consequently, on or after March 23, 2011, these new anti-avoidance measures could have the effect of transforming a qualified RRSP investment into a prohibited RRSP investment. An RRSP holder who, after March 22, 2011, holds a prohibited investment is therefore subject to a special tax for the given calendar year, corresponding to 50% of the fair market value of the prohibited investment at any time in the year when it was acquired or when it became a prohibited investment4.

However, a number of measures make it possible to eliminate the special tax. Thus, unless the RRSP holder knew or should have known at the time the shares were acquired that they were or would become a prohibited investment, the RRSP holder could obtain a refund of the special tax in question if the prohibited investment is disposed of and is no longer held in the RRSP by the end of the calendar year following the year in which the special tax applied5. For example, if on March 23, 2011 a qualified investment became a prohibited investment, the RRSP holder has until the end of 2012 to dispose of it.

In addition to the above-mentioned special tax, the RRSP holder is subject to a tax equal to 100% of the "advantage"6, namely the income and capital gain earned by the RRSP on the prohibited investment, that it is reasonable to attribute to the investment in the calendar year7. In this regard, the holder may avail himself of a transitional measure allowing him to make a tax election before December 31, 2012, (deadline that was recently extended) so that the tax equal to 100% of the "advantage" attributed to a prohibited investment as of March 23, 2011 does not apply, as long as the amount of the advantage is paid to the holder out of the RRSP in the ninety (90) days following the end of the applicable fiscal year8. If such tax election is made, incomes made on a prohibited investment as of March 23, 2011 in an RSSP will never be subject to a tax equal to 100% of the "advantage". RRSP holders who do not make such an election will be taxed at 100% of the "advantage" in each calendar year.

An RRSP holder who held a prohibited investment on March 23, 2011 should consider transferring that investment outside the RRSP before the end of 2012 in order to obtain a refund of the applicable special tax. In that respect, tax planning should be considered in order to reduce the onerous tax consequences that may result from the transfer of an investment held in an RRSP.

If you think you were holding a prohibited investment in your RRSP on or after March 23, 2011, you still have time to implement certain tax planning measures to minimize the tax consequences. We strongly urge you to discuss this with your advisers and to consult a tax professional.


1 Note that the proposed tax measures that are the subject of this article apply equally to registered retirement income funds ("RRIF").

2 Definition of "prohibited investment" in paragraph 207.01(1) of the Income Tax Act, R.S.C. (1985), 5th supp., c. 1 and amendments (the "ITA").

3 Paragraphs 207.01 (1) and (4) of the ITA.

4 Paragraphs 207.04 (1) and (2) of the ITA.

5 Paragraph 207.04 (4) of the ITA.

6 Definition of "advantage" in paragraph 207.01 (1) of the ITA.

7 Paragraphs 207.05(1) and (2) of the ITA.

8 Section 207.05(4) of the ITA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions