Owning a Non-Qualified Investment Can Be Costly

The Income Tax Act (Canada) determines whether or not a security is a “qualified investment.” When you hold non-qualified investments in a registered plan like an RRSP, RRIF or TFSA, the Canada Revenue Agency (CRA) may impose penalties on the annuitant or holder of the plan. The annuitant/holder would also be subject to tax reporting requirements. Here we look at non-qualified investments – what they are, and what to do if you hold any in your registered accounts.

Determining What’s Qualified and What’s Not

Generally, a security meets the requirements of a qualified investment if it trades on at least one stock exchange that meets the requirements of a Designated Stock Exchange (DSE), as determined by the Department of Finance Canada.

You can find a complete list of the DSEs (including well-known North American exchanges such as the NASDAQ, NYSE and TSX) by visiting www.canada.ca and searching “designated stock exchanges.”

Many Canadian investors find themselves owning a non-qualified investment when buying investments that trade on Over-the-Counter (OTC) markets (as opposed to stock exchanges), or when a security is delisted from a DSE and begins trading over-the-counter. The OTC market is a decentralized, loosely transparent and lightly regulated market where dealers act as market makers, supplying bid and ask prices for securities and currencies.

In general, a security that trades only on OTC markets is a non-qualified investment, but if it also trades on a DSE, it may be considered qualified. For example, if a stock trades over-the-counter in the U.S. but also trades on a DSE in Europe, it may qualify to be held in a registered plan.

What to Do if You Hold Non-qualified Investments

If you hold non-qualified investments in a registered plan, there may be penalties and tax reporting requirements for the annuitant or holder of the plan. To remove a non-qualified investment from your registered plan, you can:

• Sell the security by placing a sell order.
• Withdraw and transfer the security in-kind to a non-registered account. You can do this by calling us or sending us a secure message with instructions to remove the security from your account. Withholding taxes may apply.
• If the security is worthless, request to have it removed from your registered plan (if applicable). Visit Forms & Agreements, and complete and submit the form “Remove a Worthless Security from a Registered Plan.”

If you have any questions or need help removing a non-qualified investment from your registered plan, contact us by phone or secure message. For tax-specific information, speak to your professional tax advisor or call the CRA individual tax inquiries line at 1-800-959-8281.

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.