Understanding non-qualified investments

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.

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 website Opens 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.

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 us at 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 1-800-959-8281 Opens your phone app..