What’s Your Tax Issue? Using RRSP Funds for Private Company Investment

The Tax Issue:

Can I use the funds in my RRSP to invest in shares of a private company?

The Answer:

Let’s get one thing out of the way from the top: you cannot use your RRSP funds to invest in a corporation which you control. Now, for those of you that are still with us, the following explains the rules involved.

Small Business Corporation (“SBC”) Test

Generally, an SBC is a corporation that meets the following conditions:

(a)    the corporation must use all or substantially all (i.e. 90%) of its assets principally in an active business carried on primarily in Canada. Shares or debt of connected qualifying corporations are also eligible assets.

(b)    The corporation must be a Canadian corporation that is not controlled any manner by non-residents. This control test includes control in fact, as well as legal voting control.

Any investment in an SBC will qualify as long as investor is not connected with the corporation

A shareholder is considered connected if he or any related person owns, directly or indirectly, at least 10% of the shares of any class of the corporation or a related corporation.

A connected shareholder could still invest in a SBC as long as the total investment (including investments by related persons) is less than $25,000, and the investor deals at arm’s length with the corporation.

Eligible Corporation (“EC”) Test

Most RRSP investments in private companies will fall within the rules described in the SBC test above. The EC test is an older rule that still applies. It is similar to the SBC test, but more restrictive, so let’s not bore you with the details.

Suffice to say that anyone contemplating an investment in a private company with RRSP funds should not do so without first consulting a tax professional.

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