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The Fund Library publishes Samantha Prasad’s “Are your RRSP investments ‘qualified’?”

Apr 22, 2022

Are your RRSP investments “qualified”?

To avoid big penalties, know what’s allowed, what’s not

By Samantha PrasadTax Lawyer

Image: Samantha Prasad, Tax and Succession Planning LawyerThe 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.


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, by tax lawyer, Samantha Prasad. Portions of this article first appeared in The TaxLetter, ©2022 by MPL Communications Ltd. Used with permission.