Article by Jonathan Wright. Click here for homepage.

Phone:   604.678.4459


The registered retirement savings plan (RRSP) is the simplest way for the average person to save on tax. As a person earns employment income, she accrues room in her RRSP for contributions. Subsequent contributions to that RRSP are then deductible from her income.

There are rules for qualifying investments in RRSPs. Public company shares (shares listed on a designated stock exchange) are the most common, but other types of assets qualify. One that is often overlooked are certain types of private company shares.

Investing well involves uncovering hidden opportunities. One strategy is to get in at the ground level, which typically means investing before the company goes public.

Combining this type of investment with the tax benefits of contributing to an RRSP can provide significant benefits for investors. In this article I discuss the type of private company shares that can qualify as an RRSP investment.

Active Business

In order to qualify, 90% or more of the company’s assets must be used in an active business carried on in Canada. An active business is generally one which earns income from a business providing goods or services rather than receiving passive income (say from rental payments or licensing arrangements). However, even a business earning passive income will qualify if it employs more than five full-time employees.

There are some risks to putting these shares in an RRSP. Because of the active business asset test, the assets of the company will have to be monitored fairly closely. Ideally the asset mix will never go offside, but if it does, it must be rectified prior to the end of the year.


There are also ownership requirements for a qualifying private company.

The shareholder contemplating putting the shares in his RRSP may not at any time own 10% or more of the shares of any class of the company. In addition, the company cannot be controlled, directly or indirectly, by foreign persons.

The company must also deal at “arm’s length” with the RRSP shareholder. This ongoing requirement means generally that the RRSP shareholder can’t be related to the persons controlling the company, and all parties must deal with each other on commercial terms.

Investing Right

In this startup climate there are opportunities for investors in rapidly-growing private companies. These RRSP rules allow investors to make use of their registered plan for private company investments under circumstances similar to those that would arise for investments in public companies.

There are risks involved. For example, should the shares cease to qualify under the rules and become a “prohibited investment”, the potential penalties to the new shareholder are significant (up to 100% of the value of the investment). However, in circumstances where the investment is contemplated from the outset as needing to qualify under the RRSP rules, terms requiring ongoing compliance can be incorporated into investment documentation.

If you are considering investing in private company shares or are looking for general tax advice, please do not hesitate to contact the author at or 604.678.4459, or visit our website at