Q&A: Small Company Investments

Question: Can investments in small Canadian companies still be held in an RRSP or TFSA? What needs to be done by the investor or the company in order to allow this? And what limitations or rules apply? – Gordon S.

Gordon Pape answers: The answer from a legal perspective is yes. The problem is finding a financial institution that allows this in a self-directed plan. Most do not. As for the rules, here’s a condensed version of the relevant section from my book Tax-Free Savings Accounts.

“TFSAs use the same rules for holding small business shares as apply to RRSPs. In general, these allow a plan holder to invest in the stock of an active Canadian small business provided the contributor (or a plan beneficiary) is not a ‘connected shareholder.’

“The CRA’s definition of a connected shareholder is a person who owns 10% or more of the company’s stock at the time the shares go into the registered plan unless the person deals at arm’s length with the firm and the aggregate cost of all shares owned is not more than $25,000.

“Also, it must be clear that any profit on the stock does not represent a payment to the plan holder by the issuer of the shares.

“The small business does not have to be publicly traded. It may be an active taxable Canadian corporation, a venture capital company, or a ‘specified holding company.’ However, it must qualify as ‘Canadian’, which means that at least 50% of its full-time employees are in Canada or at least 50% of the salaries ‘are reasonably attributable to services provided in Canada’.”

Do you have a money question you’d like to ask Gordon? Find out how to submit it here and then check out our Money section regularly to see if it was chosen for a response. Sorry, we cannot send personal answers.