Investment
Are Your RRSP Investments "Qualified"? – Tax Authorities – Canada – Mondaq
The so-called “RRSP season” ended on March 1 this
year. That was the last date you could make RRSP contributions
eligible for a 2021 deduction. But the urgent push to get you to
contribute through February is something of a long-standing
marketing gimmick by financial institutions to persuade you to give
them more of your money. It works, because many people simply
ignore their RRSPs through the year and then scramble to come up
with funds in February. In truth, because of the magic of long-term
compounding, RRSPs work a whole lot better if you contribute
regularly through the year with some type of automatic deposit
plan.
Getting the best return on your RRSP investment is the ultimate
objective, of course. But you can only do that by ensuring that
whichever investments you choose actually qualify as an RRSP
investment. The tax rules and regulations specify that if any of
your investments are not on the Canada Revenue Agency’s (CRA)
qualified list, you could face a tax of 50% of the fair market
value of the investment at the time it was acquired or became
non-qualified – even though it’s held within your RRSP.
Although this tax is refundable in certain circumstances, it is
best to avoid these investments at the first place. (Similar
requirements for qualified investments apply to RESPs and
TSFAs.)
Of course, the government does not list each and every qualified
investment – they’re listed by category. Some types of
investments are fairly straight forward – shares of
corporations listed on qualifying stock exchanges, for example. For
most stock-market-type investments, your broker should be able to
tell you whether or not they’re qualified.
But sometimes the rules aren’t clear – and that’s
where you can get into hot water. Much as they would like you to
believe otherwise, financial institutions and investment advisors
can be wrong about RRSP-qualified investments. If you’re
investing in anything offbeat, and your financial institution or
advisor says it’s qualified for RRSPs, my advice is to get this
confirmed in writing, just to be safe.
So here’s a look at some of the more common qualified
investments (note, though, that this list is not meant to be
exhaustive):
Money and Canadian bank, trust company, or credit union
deposits, including GICs
According to CRA, money denominated in any currency is a
qualified investment in an RRSP. However, the value of
“money” cannot exceed its stated value as legal tender.
This is to prohibit investments in “collectibles” such as
rare coins or gold “Maple Leaf” coins.
Canadian government bonds, debentures, or similar
obligations
This includes bonds, debentures, notes, mortgages, or similar
obligations of the Government of Canada (or guaranteed by the
Government of Canada); a provincial government (or its agent); a
municipality in Canada; most Crown corporations; an educational
institution or hospital if repayment is made, guaranteed, or
secured by a province. Included are strip bonds or coupons if the
bond itself would qualify. (Canada Savings Bonds, which have been
discontinued, and the last of which matured in December 2021, may
have been included in some RRSPs in previous years).
Shares or units of listed securities
To qualify, units or shares must be listed on a
“designated” stock exchange, such as the Toronto Stock
Exchange, the TSX Venture Exchange, the Aequitas NEO Exchange, the
Montreal Exchange, the New York Stock Exchange, Nasdaq, London
Stock Exchange, and many others. (See the complete list on
the Ministry of Finance website.) Listed
securities include the following:
- shares of corporations
- put and call options
- warrants
- debt obligations
- units of exchange-traded funds
- units of real estate investment trusts
- units of royalty trusts
- units of limited partnerships
Also included are all types of listed preferred or common shares
(for warrants and rights, see below). Although over-the-counter
shares do not qualify under this category, they may be qualified
investments if they meet other criteria.
Foreign shares
These qualify as RRSP investments if they are listed on a
designated foreign stock exchange (see above). Not that securities
quoted on the Nasdaq Over-the- Counter Bulletin Board, and other
over-the-counter shares are not considered to be qualified
investments. It appears that you can write an option on these
qualifying shares, provided it is “covered.” If a plan
sells short, CRA could (among other things) take the position that
the RRSP is actively engaged in a business, resulting in certain
tax penalties.
Warrants or rights
These types of securities give the owner a right to acquire a
qualified investment. This appears to include Canadian
exchange-traded call options, provided that the underlying
investment is qualified, i.e., a call option for a Canadian-listed
company. However, CRA has indicated that a put option would not
qualify.
Moreover, CRA does not consider a convertible debenture to be a
“warrant or right,” although such a debenture may, of
course, qualify under another category. However, as per amendments
in 2005, the issuer of the warrant or right will be required, on an
ongoing basis, to deal at arm’s length with each person who is
an annuitant, a beneficiary, an employer or a subscriber under the
plan. Moreover, the underlying property has to be a share or unit
of the issuer or a share, unit, or debt of another person or
partnership, or a warrant to acquire such property, which at the
time of the issuance did not deal at arm’s length with the
issuer.
REITs and Income Trusts
Canadian real estate investment trusts (REITs) and income trusts
that are structured as mutual fund trusts are considered qualified
RRSP investments. While the main popularity of these trusts stems
from higher apparent yields than conventional interest- bearing
investments, the tax features can also be quite beneficial.
Corporations pay tax on their income and then distribute profits
as dividends, which are taxed again in the hands of shareholders
(with the dividend tax credit available to non-RRSP investors in
Canadian companies). Income trusts and REITs, on the other hand,
are designed so that income is reported and tax is paid by the
investor, not the trust, so there is only a single level of
tax.
In most trusts, there is a significant element of tax shelter on
cash distributions due to depreciation or similar deductions
claimed by the trust. Effectively, the benefit of this shelter will
eventually be “recaptured” when the investor sells the
trust units, but usually as a capital gain.
If income trusts and REITS are held by an RRSP, these tax
benefits will be lost. However, to the extent that distributions
from the trust generate taxable income, there will be no current
tax to the RRSP either. While loss of tax benefits may make
personal ownership preferable, the degree of shelter relative to
the taxable income will vary from fund to fund, and may decrease
over time, e.g., as assets in the trust become fully depreciated,
leaving more ongoing tax exposure. However, flipping such a fund
into an RRSP may result in significant tax exposure on the
transfer, especially since the cost base of the fund will decrease
as shelter is used.
One innovation is the use of funds that effectively bifurcate
income trusts into high-tax components (designed for RRSPs) and
low-tax units, designed for individual investment.
Options – calls and puts
CRA used to consider the writing of “naked call
options” (the short sale of a call option) as being
speculative in nature, thus resulting in the taxation of the RRSP
on its taxable income for the year. However, the amendments to the
Income Tax regulations in the fall of 2005 made certain derivatives
eligible as qualified investments for your RRSPs. These now include
call options, and put options on stocks, currencies, and ETFs.
Therefore, purchasing calls (instead of stocks), covered call
writing, and purchasing puts instead of selling stocks short are
now allowed in RRSPs.
Mortgages
Generally, a qualifying mortgage must be from people whom you
deal with at “arm’s length” – so you can’t
hold a mortgage from members of your immediate family or an in-law,
for example. And if you and your neighbour give each other a
mortgage – i.e., in a “criss-cross” arrangement,
this could also violate the “arm’s-length”
requirement. The mortgage must not exceed the fair market value of
the property (other than as a result of a decline in the market
after the mortgage was given).
Happily, there’s a second alternative – the RRSP
mortgage, which involves having your RRSP make you a loan secured
by a mortgage on your home. This can be permissible if the mortgage
loan from your RRSP is insured and you pay your RRSP interest at
market rates in effect when the RRSP loan is made.
Corporate debt
Debt obligations issued by a Canadian corporation or trust are
qualified investments, assuming that certain conditions are met.
The purpose behind the inclusion of corporate debt was to
accommodate investments in debt obligations (more commonly known as
asset-backed securities) that are backed by cash flows from pools
of loans and other receivables.
Debt obligations
Any debt obligation (e.g., bankers’ acceptance, commercial
paper, debt of a foreign government) that has an investment grade
rating and that is part of a minimum $25 million issuance.
Precious metals
Investment-grade gold and silver bullion, coins, bars, and
certificates are qualified investments.. However, these investments
must be acquired either from the producer of the investment or from
a regulated financial institution.
Previously published in The Fund Library on April 21,
2022
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.
Investment
Bill Morneau slams Freeland’s budget as a threat to investment, economic growth
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Finance Minister Chrystia Freeland’s predecessor Bill Morneau says there was talk of increasing the capital gains tax when he was on the job — but he resisted such a change because he feared it would discourage investment by companies and job creators.
He said Canada can expect that investment drought now, in response to a federal budget that targets high-end capital gains for a tax hike.
“This was very clearly something that, while I was there, we resisted. We resisted it for a very specific reason — we were concerned about the growth of the country,” he said at a post-budget Q&A session with KPMG, one of the country’s large accounting firms.
Morneau, who served as Prime Minister Justin Trudeau’s finance minister from 2015 to 2020 before leaving after reports of a rift, said Wednesday that Freeland’s move to hike the inclusion rate from one-half to two-thirds on capital gains over $250,000 for individuals, and on all gains for corporations and trusts, is “clearly a negative to our long-term goal, which is growth in the economy, productive growth and investments.”
Morneau said the wealthy, business owners and corporations — the people most likely to face a higher tax burden as a result of Freeland’s change — will think twice about investing in Canada because they stand to make less money on their investments.
“We’ve created a disincentive and that’s very difficult. I think we always have to recognize any measure that creates a disincentive for investment not only impacts us within the country but also impacts foreign investors that are looking at our country,” he said.
“I don’t think there’s any way to sugarcoat it. It’s a challenge. It’s probably very troubling for many investors.”
KPMG accountants on hand for Morneau’s remarks said they’ve already received calls from some clients worried about how the capital gains change will affect their investments.
Praise from progressives
While Freeland’s move to tax the well-off to pay for new spending is catching heat from wealthy businesspeople like Morneau, and from the Canadian Chamber of Commerce, progressive groups said they were pleased by the change.
“We appreciate moves to increase taxes on the wealthiest Canadians and profitable corporations,” said the Canadian Labour Congress.
“We have been calling on the government to fix the unfair tax break on capital gains for a decade,” said Katrina Miller, the executive director of Canadians for Tax Fairness. “Today we are pleased to see them take action and decrease the tax gap between wage earners and wealthy investors.”
“This is how housing, pharmacare and a Canada disability benefit are afforded. If this is the government’s response to spending concerns, let’s bring it on. It’s about time we look at Canada’s revenue problem,” said the Canadian Centre for Policy Alternatives.
The capital gains tax change was pitched by Freeland as a way to make the tax system fairer — especially for millennials and Generation Z Canadians who face falling behind the economic status of their parents and grandparents.
“We are making Canada’s tax system more fair by ensuring that the very wealthiest pay their fair share,” Freeland said Tuesday after tabling her budget in Parliament.
WATCH: New investment to lead ‘housing revolution in Canada,’ Freeland says
The capital gains tax, which the government says will raise about $19 billion over five years, is also being pitched as a way to help pay for the government’s ambitious housing plan.
The plan is geared toward young voters who have struggled to buy a home. Average housing prices in Canada are among the highest in the world and interest rates are at 20-year highs.
Tuesday’s budget document says some wealthy people who make money off asset sales and dividends — instead of income from a job — can face a lower tax burden than working and middle-class people.
Morneau, who comes from a wealthy family and married into another one, is on the board of directors of CIBC and Clairvest, a private equity management firm that manages about $4 billion in assets.
According to government data, only 0.13 per cent of Canadians — people with an average income of about $1.4 million a year — are expected to pay more on their capital gains as a result of this change.
But there’s also a chance less wealthy people will pay more as a result of the change.
Put simply, capital gains occur when you sell certain property for more than you paid for it.
While capital gains from the sale of a primary residence will remain untaxed, the tax change could affect the sales of cottages and other seasonal and investment properties, along with stocks and mutual funds sold at a profit.
A cottage bought years ago and sold for a gain of more than $250,000 would see part of the proceeds taxed at the new higher rate.
But there’s some protection for people who sell a small business or a farming or fishing property — the lifetime capital gains exemption is going up by about 25 per cent to $1.25 million for those taxpayers.
Freeland said Tuesday she anticipates some blowback.
“I know there will be many voices raised in protest. No one likes paying more tax, even — or perhaps particularly — those who can afford it the most,” she said.
“Tax policy is not only, or chiefly, the province of accountants or economists. It belongs to all of us because it is how we decide what kind of country we want to live in and what kind of country we want to build.”
Morneau had little praise for what his successor included in her fourth budget.
Morneau said Canada’s GDP per capita is declining, growth is limited and productivity is lagging other countries — making the country as a whole less wealthy than it was.
Canada has a growth problem, Morneau warns
The government is more interested in rolling out new costly social programs than introducing measures that will reverse some of those troubling national wealth trends, he said.
“Canada is not growing at the pace we need it to grow and if you can’t grow the size of the pie, it’s not easy to figure out how to share the proceeds,” he said.
“You think about that first before you add new programs and the government’s done exactly the opposite.”
The U.S. has a “dynamic investment culture,” something that has turbo-charged economic growth and kept unemployment at decades-low levels, Morneau said. Canada doesn’t have that luxury, he said.
He said Freeland hasn’t done enough to rein in the size of the federal government, which has grown on Trudeau’s watch.
The deficit is now roughly double what it was when he left office, Morneau noted.
“There wasn’t enough done to reduce spending,” he said, while offering muted praise for the government’s decision to focus so much of its spending on the housing conundrum. “The priority was appropriate.”
Investment
Saudi Arabia Highlights Investment Initiatives in Tourism at International Hospitality Investment Forum
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RIYADH, Saudi Arabia — The Saudi Ministry of Tourism is currently taking a prominent stage at the International Hospitality Investment Forum (IHIF), presenting a unique opportunity for global investors to dive into the thriving tourism landscape of the Kingdom. With the spotlight on the Tourism Investment Enablers Program (TIEP), that was recently announced, Saudi Arabia is aggressively pushing towards its Vision 2030 goal of being a top global tourism destination for investors and tourists alike.
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This strategic presentation comes at a time when Saudi Arabia’s tourism sector celebrates an incredible milestone of 100 million visitors in 2023, seven years ahead of schedule, marking a significant stride towards economic diversification and emphasizing the sector’s growing contribution to the national GDP. The flagship Hospitality Investment Enablers (HIE), one of TIEP’s initiatives, aims to leverage this momentum, planning an investment infusion into the hospitality sector of up to SAR 42 billion in key destinations, which alone is anticipated to create 120,000 new jobs by 2030.
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The IHIF audience is getting a close look at Saudi Arabia’s plans to expand its accommodation capacity dramatically. The Kingdom is targeting an increase in hotel rooms to over 500,000 and aiming to welcome 150 million visitors annually by 2030. The HIE stands at the core of these ambitions, designed to energize the hospitality sector by introducing a new wave of supply in targeted tourism hotspots, significantly enriching the Kingdom’s diverse tourism offerings.
The initiative is supported by a suite of strategic enablers, including access to government-owned land under favorable terms, streamlined project development processes, and regulatory adjustments aimed at reducing barriers to market entry and operational costs. This comprehensive approach is expected to catalyze a significant socio-economic transformation within the Kingdom, with private sector investments projected to reach SAR 42.3 billion and a forecasted annual GDP increase of SAR 16.4 billion by 2030.
Saudi Arabia’s active participation in IHIF aims to showcase the Kingdom as an enticing investment frontier for international investors, emphasizing the lucrative opportunities within the tourism and hospitality sectors. This global stage provides the perfect platform for the Ministry of Tourism to forge lasting partnerships and highlight the Kingdom’s commitment to elevating its tourism industry standards, fostering sustainable growth, and offering robust support to investors.
Through this engagement, the Saudi Ministry of Tourism is not just showcasing investment opportunities; it is inviting the world to be a part of Saudi Arabia’s ambitious journey towards redefining global tourism norms. Investors are encouraged to seize this unparalleled chance to collaborate with the Kingdom, as it paves the way for a new era of tourism excellence aligned with Vision 2030’s transformative objectives.
Investment
Web3 investment up 55% in Q1 as crypto VC interest rebounds – Cointelegraph
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