RRSP Prohibited Investments: 50% Tax, Form RC339, and Waivers

RRSP prohibited investments are assets your registered retirement savings plan holds that tie back to you or people close to you, and the Income Tax Act punishes them with a 50% tax on the asset’s fair market value plus a 100% tax on any income or gains the asset produces while it sits in the plan.¹ The rule exists because the RRSP is meant to shelter retirement savings, not to bankroll your own business or lend money to your family. The combined penalties often exceed what the investment is worth.

What Makes an Investment Prohibited

The definition turns on your relationship to the asset, not the type of asset.² Four categories are caught:

Your own debt. Any loan, mortgage, or promissory note where you are the borrower and your RRSP is the lender.
Entities where you hold a significant interest. Shares, debt, or partnership interests in a corporation, trust, or partnership where you (or people connected to you) own 10% or more of any class of shares or equivalent interest.
Non-arm’s-length holdings. Shares, debt, or interests in any person or entity you don’t deal with at arm’s length, regardless of ownership percentage.
Rights to acquire any of the above. Options, warrants, or similar rights.

The 10% threshold counts shares held by family and by entities you control, not just what you personally own.³ “Not at arm’s length” covers your spouse, parents, children, siblings, and any corporation controlled by you or these family members. The CRA also treats you as not dealing at arm’s length with your own registered plan.

Where People Actually Get Caught

Private corporations are the most common source of trouble. If you run a consulting business, a rental holding company, or a family retail operation and your RRSP buys its shares, those shares are prohibited. Paying fair market value doesn’t cure it. Whether the business is profitable doesn’t matter. The connection is the problem.

Self-directed lending is close behind. Say your RRSP lends you money personally, secured by a mortgage on your home, at a market rate and on standard terms. Still prohibited, because you are both plan holder and borrower.³ An RRSP can hold a mortgage, but only if the borrower is at arm’s length, the property is in Canada, and the loan doesn’t exceed the property’s value.

Partnership interests trip people up too. If your RRSP buys into a limited partnership where you or a family member holds 10% or more of the total interest, it’s prohibited. Small real estate syndications and professional practice partnerships often fall into this trap when the plan holder is also a working partner.

Prohibited Is Not the Same as Non-Qualified

These two categories overlap in their penalties but come from different logic. A prohibited investment is about your relationship to the entity. A non-qualified investment is about whether the asset itself appears on the list of property RRSPs are allowed to hold under Regulation 4900 of the Income Tax Regulations, which covers publicly traded securities on designated exchanges, GICs, mutual funds, government bonds, and certain other prescribed property.⁴ Anything outside that list is non-qualified.

An investment can be both at once. Shares in your private company are non-qualified because private shares generally aren’t prescribed, and prohibited because you have a significant interest. The same 50% tax and 100% advantage tax apply either way, but the distinction matters when you try to fix the problem, because refund and waiver conditions differ slightly between the two.

The 50% Tax on Fair Market Value

When your RRSP acquires a prohibited investment, or when a compliant investment later becomes prohibited, you owe tax equal to 50% of the asset’s fair market value at that moment.⁵ The tax is assessed against you personally as the annuitant, not against the RRSP trust. An $80,000 purchase of shares in a corporation where you own 15% costs you $40,000 in penalty tax on that single transaction.

The tax hits at the point of acquisition or the point the investment becomes prohibited. It does not recur every year the asset sits in the plan. But leaving the asset in the RRSP keeps the advantage tax running and makes a refund harder to get.

The 100% Tax on Income and Gains

On top of the 50% penalty, the CRA imposes a 100% tax on all income the prohibited investment produces inside the plan. That captures dividends, interest, and the portion of any capital gain that accrued while the asset was prohibited.¹ If those $80,000 shares pay $3,000 in dividends while sitting in your RRSP, the full $3,000 goes to the government. Sell them later for $95,000, and the $15,000 gain from the prohibited period is also taxed at 100%.

The advantage tax applies no matter when the investment was originally acquired.³ This is where real damage accumulates. The longer the asset stays in the plan, the more income it generates, and every dollar of that income goes to the CRA.

Valuing Private Shares

Publicly traded securities have quoted prices, but private shares need a formal valuation to set the fair market value the penalty is calculated against. The CRA recognizes two main approaches: an earnings-based method for operating businesses that generate revenue from products or services, and an asset-based method for companies whose value comes primarily from holdings such as real estate or investment portfolios.⁶

Under-reporting the value creates fresh risk. If the CRA audits and finds a higher fair market value, the penalty tax scales up and interest runs on the underpayment. For any prohibited investment involving private shares, a professional business valuation is worth the cost. The CRA’s Regional Valuation Officers can request five years of financial statements, shareholder agreements, asset appraisals, and details of recent arm’s-length offers for the company’s shares.⁶

Filing and Paying With Form RC339

You report both the 50% penalty and the advantage tax on Form RC339, the Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs.⁷ It’s separate from your T1 return and asks for specifics: acquisition date, fair market value at the trigger point, and a description of the investment.

The deadline is June 30 of the year after the calendar year in which the investment became prohibited. Shares purchased in September 2025 mean Form RC339 and full payment are due by June 30, 2026.¹ Payment goes to the Receiver General through your bank, CRA My Account, or standard tax payment channels. Late filing and late payment both attract interest.

Recovering the 50% Tax

You can get the 50% penalty back if the asset is out of the plan quickly enough. It must be disposed of, or must cease to be a prohibited investment, before the end of the calendar year following the year the tax arose.⁸ A 2025 trigger gives you until December 31, 2026. The Minister of National Revenue may extend that deadline in some cases.

Removal usually means selling the asset to an unrelated third party or withdrawing it from the RRSP as a taxable distribution. Moving it to another registered plan you control does not solve the problem. The refund isn’t automatic. You request it by filing a revised Form RC339 or by writing to the CRA to explain what you did with the investment and when.

One important limit: the refund covers only the 50% tax on fair market value. The 100% tax on income and capital gains earned during the prohibited period is not refundable.⁸ That money is gone regardless of how fast you act, which is exactly why speed matters: less time in the plan means less income and a smaller advantage tax bill.

Asking the Minister for a Waiver

If the prohibited investment came from a genuine mistake, the Minister has discretion under subsection 207.06(2) of the Income Tax Act to waive or cancel all or part of the 50% tax.⁹ The Minister looks at whether the outcome is “just and equitable,” considering whether the tax arose from a reasonable error, whether the same transactions triggered other taxes, and whether you’ve made payments from the plan to correct the problem.

A waiver request goes in writing and needs a full account of what happened. The CRA expects your plan details, a description of the prohibited investment with ownership percentages, acquisition and disposal dates, cost and fair market value, a complete history of the corrective steps you took, and an explanation of why the error was reasonable.³

Waivers are decided case by case with no guaranteed outcome. An honest misunderstanding about a company’s ownership structure has a much better chance than a deliberate attempt to shelter business income. If you find a prohibited investment in your plan, moving quickly and documenting every step strengthens the request. Waiting for the CRA to find it first makes a waiver considerably harder to secure.

1
Canada Revenue Agency. Tax Payable on Prohibited Investments
2
Justice Laws Website. Income Tax Act – Section 207.01
3
Canada Revenue Agency. Income Tax Folio S3-F10-C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs, FHSAs and TFSAs
4
Justice Laws Website. Income Tax Regulations – Section 4900
5
Justice Laws Website. Income Tax Act – Section 207.04
6
Canada Revenue Agency. Policy Statement on Business Equity Valuations
7
Canada Revenue Agency. RC339 Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs
8
Canada Revenue Agency. Refund of Taxes Paid on Non-Qualified or Prohibited Investments
9
Justice Laws Website. Income Tax Act – Section 207.06