CRA defines non-qualified investments for registered account

The Canada Revenue Agency (CRA) defines non-qualified investments for registered plans like RRSPs, RRIFs, TFSAs, RESPs, RDSPs, and FHSAs as investments that do not meet the criteria of "qualified investments" under the Income Tax Act (Canada). When purchasing stocks in the U.S. market, understanding which investments are non-qualified is critical to avoid tax penalties. Below is an explanation of non-qualified investments in the context of U.S. stocks, based on CRA rules and regulations:

### Non-Qualified Investments in the Context of U.S. Stocks
Non-qualified investments are securities that fail to meet the CRA’s criteria for qualified investments, particularly when held in registered accounts. For U.S. stocks, the key factor is whether the stock is traded on a **Designated Stock Exchange (DSE)** as determined by the Department of Finance Canada. Here’s a breakdown:

1. **Stocks Traded Only on Over-the-Counter (OTC) Markets**:
   - Securities that trade exclusively on OTC markets in the U.S., such as the OTC Bulletin Board (OTCBB) or OTC Markets Group (e.g., Pink Sheets), are generally considered **non-qualified investments** unless they are also listed on a DSE elsewhere (e.g., a European or Canadian exchange like the TSX).
   - **Example**: A U.S. company’s stock trading solely on OTCQX or OTCQB is non-qualified unless it is also listed on a DSE like the NYSE, NASDAQ, or another recognized exchange.
   - Reason: OTC markets are decentralized, less regulated, and lack the transparency required for CRA’s qualified investment status.[](https://www6.royalbank.com/en/di/reference/article/owning-a-non-qualified-investment-can-be-costly/j7sfxevb)[](https://www.investorsedge.cibc.com/en/learn/investing/portfolio-strategies/understanding-non-qualified-investments.html)[](https://www6.royalbank.com/en/di/hubs/investing-academy/article/owning-a-non-qualified-investment-can-be-costly/k8kupbpp)

 

2. **Delisted Stocks**:
   - If a U.S. stock was previously listed on a DSE (e.g., NYSE or NASDAQ) but is delisted and moves to an OTC market, it becomes a **non-qualified investment** at the time it ceases to trade on the DSE.
   - **Example**: If a company like Revlon is delisted from the NYSE and begins trading on an OTC market, it becomes non-qualified for registered accounts.[](https://www.reddit.com/r/PersonalFinanceCanada/comments/yqnfdn/non_qualified_shares_in_a_tfsa/)

 

3. **Certain Derivatives and Options**:
   - While some derivatives (e.g., covered call options or put options on qualifying stocks) are considered qualified investments following amendments to the Income Tax Regulations in 2005, **naked call options** or other speculative derivatives not tied to a qualified underlying security may be non-qualified.
   - **Example**: A put option on a U.S. stock listed on NASDAQ may be qualified, but a naked call option or an option on a non-DSE-listed stock would not be.[](https://www.mondaq.com/canada/tax-authorities/1186610/are-your-rrsp-investments-qualified)

 

4. **Prohibited Investments Misclassified as Non-Qualified**:
   - If a U.S. stock is both a non-qualified and a **prohibited investment** (e.g., a security issued by a person or entity with whom the account holder does not deal at arm’s length), it is treated solely as a prohibited investment under CRA rules. Prohibited investments carry similar tax implications but are subject to additional restrictions.[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/tax-payable-on-tfsas.html)

 

### Tax Implications of Holding Non-Qualified Investments
If a registered account (e.g., RRSP, TFSA) holds a non-qualified investment, the following consequences apply:
- **50% Tax on Fair Market Value (FMV)**: A tax equal to 50% of the FMV of the non-qualified investment at the time it was acquired or became non-qualified is imposed on the account holder. This tax is reported and paid via **Form RC339** (for RRSPs, RRIFs, RESPs, RDSPs) or **Form RC243** (for TFSAs) by June 30 of the following year.[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/anti-avoidance-rules-rrsps-rrifs/tax-payable-on-non-qualified-investments.html)[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/investments-your-fhsa.html)[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/tax-payable-on-tfsas.html)

- **Tax on Income and Gains**: Any income (e.g., dividends) or capital gains from the non-qualified investment is taxable to the trust of the registered plan, regardless of when the investment was acquired.[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/anti-avoidance-rules-rrsps-rrifs/tax-payable-on-non-qualified-investments.html)[](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/tax-free-savings-account-tfsa-issuers/taxes.html)

- **Refund Eligibility**: The 50% tax may be refunded if the non-qualified investment is disposed of or ceases to be non-qualified before the end of the calendar year following the year the tax arose, provided the account holder did not know (or should not have known) the investment was non-qualified.[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/anti-avoidance-rules-rrsps-rrifs/refund-taxes-paid-on-non-qualified-prohibited-investments.html)

- **Additional Reporting**: Financial institutions must report non-qualified investments to the CRA and the account holder by the end of February of the following year, including the FMV and the date the investment became non-qualified.[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/anti-avoidance-rules-rrsps-rrifs/tax-payable-on-non-qualified-investments.html)[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/investments-your-fhsa.html)

 

### Practical Considerations for U.S. Stocks
- **Check the Exchange**: Before purchasing U.S. stocks for a registered account, confirm that the stock is listed on a DSE, such as:
  - **NYSE** (New York Stock Exchange)
  - **NASDAQ** (National Association of Securities Dealers Automated Quotations)
  - Other DSEs listed by the Department of Finance Canada (available at www.canada.ca by searching “designated stock exchanges”).

https://www6.royalbank.com/en/di/reference/article/owning-a-non-qualified-investment-can-be-costly/j7sfxevb

(https://www6.royalbank.com/en/di/hubs/investing-academy/article/owning-a-non-qualified-investment-can-be-costly/k8kupbpp)

- **Monitor Delistings**: Stocks can become non-qualified if they are delisted from a DSE. Regularly check the listing status of your holdings, as brokers are required to notify you if a stock becomes non-qualified.[](https://www.reddit.com/r/PersonalFinanceCanada/comments/yqnfdn/non_qualified_shares_in_a_tfsa/)
- **Broker Guidance**: While brokers can advise on whether a stock is qualified, their advice is not always definitive. Obtain confirmation in writing for non-standard investments to protect against errors.[](https://www.mondaq.com/canada/tax-authorities/1186610/are-your-rrsp-investments-qualified)
- **Corrective Action**: If you hold a non-qualified investment, you can:
  - Sell the stock and move proceeds to a qualified investment.
  - Transfer the stock to a non-registered account (in-kind deregistration), which may trigger a deemed disposition at FMV and potential capital gains/losses.[](https://www.reddit.com/r/PersonalFinanceCanada/comments/yqnfdn/non_qualified_shares_in_a_tfsa/)
  - File the appropriate CRA form (e.g., RC243 for TFSAs) to report and potentially seek a refund of the 50% tax.[](https://www.reddit.com/r/PersonalFinanceCanada/comments/yqnfdn/non_qualified_shares_in_a_tfsa/)[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/anti-avoidance-rules-rrsps-rrifs/refund-taxes-paid-on-non-qualified-prohibited-investments.html)

### Examples of Qualified vs. Non-Qualified U.S. Stocks
- **Qualified**: Stocks like Apple Inc. (AAPL) or Microsoft Corp. (MSFT) listed on NASDAQ or NYSE are qualified investments because these exchanges are DSEs.
- **Non-Qualified**: A U.S. company trading only on OTC markets (e.g., OTCQB or Pink Sheets) that is not listed on a DSE would be non-qualified. For instance, if a small-cap U.S. company trades solely on OTCQX and not on NYSE or TSX, it is non-qualified.

### Recommendations
- **Consult a Tax Professional**: Given the complexity of these rules, consult a tax advisor or contact the CRA’s individual tax inquiries line at 1-800-959-8281 for specific guidance on U.S. stock investments.[](https://www6.royalbank.com/en/di/reference/article/owning-a-non-qualified-investment-can-be-costly/j7sfxevb)[](https://www.investorsedge.cibc.com/en/learn/investing/portfolio-strategies/understanding-non-qualified-investments.html)
- **Verify with Your Broker**: Ensure your brokerage confirms the stock’s listing on a DSE before purchasing for a registered account.
- **Stay Informed**: Regularly review the CRA’s guidelines (e.g., **Income Tax Folio S3-F10-C1**) and the Department of Finance’s list of DSEs to ensure compliance.[](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/tax-free-savings-account-tfsa-issuers/taxes.html)[](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account/investments-your-fhsa.html)

By focusing on stocks listed on DSEs like NYSE or NASDAQ and avoiding OTC-only securities, you can minimize the risk of holding non-qualified investments in your registered accounts. If you’re unsure about a specific U.S. stock, always verify its listing status and consult with a professional to avoid costly tax penalties.

 

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From CIBC:

There are certain investments that the CRA (Canada Revenue Agency) considers non-qualified investments. It’s important for investors to understand what a non-qualified investment is, and the tax implications associated with these types of securities. These securities cannot be held in RRSPs (Registered Retirement Savings Plans), Registered Retirement Income Funds (RRIFs), Locked-in Income Funds (LIFs), Locked-in Retirement Accounts (LIRAs), TFSAs (Tax-Free Savings Accounts), RESPs (Registered Education Savings Plans) or FHSAs (First Home Savings Accounts).

Here, we’ll discuss non-qualified investments and what you can do if they’ve been identified in your registered account.

What is a non-qualified investment, and how is it identified?

Investors may find they own non-qualified investments if these securities trade on OTC (over the counter) markets, or if a security that once traded on a designated exchange has been delisted from the exchange and moved to an OTC exchange. 

Another way of receiving non-qualified investments is through corporate actions, where an investor owns securities and the company has decided to pay shareholders in new securities. These new securities may be non-qualified in registered accounts. 

Generally, for a security to be held in a registered account, the security must be listed on designated stock exchanges. Designated stock exchanges consist of stock exchanges that have been designated by the Minister of Finance and include all stock exchanges that are prescribed in Canadian Income Tax Regulations. More information can be found by searching for “designated stock exchanges” on the Government of Canada’s websiteOpens in a new window..

Securities that trade on OTC markets, which are lightly regulated, are generally considered non-qualified investments. However, if a security trades on an OTC market in North America while also being listed on a designated exchange elsewhere, then the security may be considered qualified. For example, if a stock trades OTC in the U.S. and trades on a designated exchange in Europe, it may be qualified for registered plans.

What to do if you hold non-qualified investments

If you hold non-qualified investments in a registered plan, there may be tax penalties and tax reporting requirements for the holder or the annuitant of the registered plan.

There are two types of taxes that may be applied when holding a non-qualified investment:

• The registered account will be subject to tax on any income or gains from the non-qualified investment. These taxes, if owing, are non-refundable and will be charged to your registered account in March of the following year.
• A 50% tax on the Fair Market Value (FMV) of the security, as of the date it was acquired by the account holder or became non-qualified, may be charged to the annuitant or holder by the CRA.

To minimize any potential tax penalties, you can do one of the following:

• Sell the securities, by making an online trade or contacting a live phone trader. Commissions with a phone trader will be higher, unless the security cannot be traded online.
• You can de-register, meaning withdraw, the securities from your registered account by contacting our call centre. Withholding taxes may apply upon withdrawal of non-qualified securities.
• If the security is no longer tradable, you can remove the security by completing a Direction to Remove and Assign Delisted Securities form (PDF, 165 KB)Opens in a new window. . You'll also find it in the CIBC Investor's Edge Forms Centre.

If you have any questions regarding non-qualified investments, please contact usat CIBC Investor’s Edge..

If you’re unsure of the best action to take regarding these securities, or how these steps will impact your personal tax situation, contact your personal tax advisor, or call the CRA’s individual tax inquiries line, at 1-800-959-8281Opens your phone app..

 

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https://www.canada.ca/en/revenue-agency/services/charities-giving/charities/policies-guidance/stock-exchange-designated.html