Owning a Non-Qualified Investment Can be Costly

The Canada Revenue Agency (CRA) tracks the types of investments that are eligible for registered plans and can impose tax penalties for any non-qualified investments held within them. That's why it's important for investors to understand what determines a non-qualified investment and what you can do if you find yourself holding any in a registered plan like a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF) or Tax-Free Savings Account (TFSA).

Here we look at non-qualified investments: what they are and what you can do if you hold any in your registered plans.

How to determine what's qualified and what's not

Canada's Income Tax Act and regulations determine whether or not a security is a "qualified investment." Generally, a security meets the requirements of a qualified investment if it trades on at least one stock exchange that's considered a Designated Stock Exchange as determined by the Department of Finance Canada.

You can find a complete list of designated exchanges — which include 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 designated exchange and begins OTC trading. 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 designated exchange it may be considered qualified. For example, if a stock trades OTC in the U.S. but also trades on a designated exchange 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 holder or annuitant of the plan. To remove a non-qualified investment from your registered plan, you have a few options. (RBC Direct Investing clients can follow the links to sign in and take action.)

• 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 or logging into your account and sending 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 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.