Section 207.04

1. An RRSP trust, which holds shares of Company A that are a non-qualified investment, receives a stock dividend comprising additional shares of the same class. 2. The RRSP trust holds shares of Company X, which are a qualified investment, and receives thereon a dividend in kind of shares of Company Y that are a non-qualified investment. Does s. 146(10.1) or 207.04(1) apply? CRA responded:

In Scenario 1, because the shares of Company A are non-qualified investments, the RRSP trust will be subject to Part I tax pursuant to subsection 146(10.1)… in respect of its income from the stock dividends paid by those shares. In addition, the annuitant of the RRSP will be liable for the tax payable on non-qualified investments… pursuant to subsection 207.04(2)…, the… tax payable is equal to 50% of the fair market value of the additional Company A shares at the time they are received… .

In Scenario 2, the annuitant of the RRSP will be liable to pay the 50% tax payable under subsection 207.04(1) of the Act subject to a possible refund of the tax pursuant to subsection 207.04(4) of the Act as a result of the RRSP trust's acquisition of the non-qualified Company Y shares. Because the shares of Company X are qualified investments, the RRSP trust will not be required to pay Part I tax under subsection 146(10.1)… . in respect of… the in-kind dividend of Company Y shares;

In response to a general inquiry, CRA stated:

If a trust governed by a registered plan acquires a qualified investment that later becomes a non-qualified investment, the holder of the TFSA or the annuitant of the RRSP or RRIF will be subject to a tax equal to 50% of the fair market value of the investment at the point in time it becomes non-qualified. In this situation, the tax is refundable if the holder or annuitant disposes of the non-qualified investment before the end of the next year or at any later time the Minister of National Revenue considers reasonable given the circumstances.