The most recent federal budget took steps to restrict investment in private company shares which formerly qualified for RRSP. Under the new rules, private company shares where there is a significant interest (the annuitant to the RRSP or a non-arm's length person has greater than 10% ownership) are now prohibited RRSP investments.

The most recent federal budget took steps to restrict investment in private company shares which formerly qualified for RRSP.  Under the new rules, private company shares where there is a significant interest (the annuitant to the RRSP or a non-arm's length person has greater than 10% ownership) are now prohibited RRSP investments. However, note that this will not affect the RRSP eligibility of investments in private company shares where there is no significant interest.

The consequences of holding prohibited investments are a tax of 50% of the value of the prohibited investment.  This tax can be avoided if the prohibited investment is transferred, sold or swapped out of the plan before December 31, 2012. 

There is also a tax of 100% of the increase in value of the prohibited investment from the value at March 22, 2011, the date of the budget announcement, until the time of transfer out.  This tax could have been waived if the prohibited investment was transferred, sold or swapped out of the RRSP by June 30, 2011.

There is a practical issue of enforcement, as private company shares are typically not valued regularly.  There may be issues establishing a value at March 22, 2011 and at future points to determine this tax.  There may be no consequence to missing the June 30^th deadline if the value of the company has not increased from March 22^nd and a date after June 30^th when the prohibited investment is removed from the plan. 

For more information about this and to see if you will be affected, please contact your RLB LLP advisor.