Compliance
Compliance: Get Ready for New Registered Plan Investment Restrictions Under Prohibited Investments and Advantage Taxes
New rules will impose heavy penalties on registered plans holding certain prohibited or non-qualified investments—understanding them now will save trustees from costly surprises.
By NomadicTax Research Team • 5-8 min read • March 29, 2026
## What’s Changing
Recent explanatory legislative proposals have introduced **new definitions and special taxes** governing prohibited investments held by registered plans such as RRSPs, RRIFs, and TFSAs. Key updates include:
- **New section 5006** of the Income Tax Regulations defines specific property as **prohibited investments** for the purposes of paragraph (d) in the existing “prohibited investment” definition. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2026/ita-lir-0126-n-2-eng.html?utm_source=openai))
- Registered plans holding prohibited investments will face two special taxes under **Part XI.01** of the Income Tax Act:
1. A 50% tax on the fair market value of the prohibited investment.
2. A 100% “advantage tax” on any income or capital gains derived from that investment. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2026/ita-lir-0126-n-2-eng.html?utm_source=openai))
- These rules largely target **connected persons** holding property via mortgage investment corporations and other similar investment vehicles, particularly where there is significant indebtedness and control relationships. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2026/ita-lir-0126-n-2-eng.html?utm_source=openai))
## Who is Affected & When
- Trustees and administrators of **registered plans** must assess whether any holdings are now classified as prohibited investments under the new rule set.
- The rules apply **with respect to payments or income arising on or after July 1, 2026**. Any gains, income, or new contributions must be evaluated under the updated rules. ([fin.canada.ca](https://fin.canada.ca/drleg-apl/2026/ita-lir-0126-n-2-eng.html?utm_source=openai))
## Actionable Compliance Steps
- **Inventory all investment holdings**: Look at portfolio components especially in entities with complex ownership. Identify those that might be “prohibited” under the new definitions (e.g., shares of corporations with a connected person and significant indebtedness).
- **Measure exposure**: Calculate the fair market value of potentially impacted investments to assess the 50% tax risk, and estimate possible advantage tax on income/gains.
- **Restructure holdings**: Where possible, shift holdings to non-prohibited investments or isolate connected-person relationships. Consider converting structures or liquidating problematic investments before July 1, 2026.
- **Document diligently**: Maintain records of when you acquired investments, who benefits from them, their structure, and relationship to connected persons. This will be crucial for defending your position.
## Practical Example
A trustee oversees an RRSP portfolio containing shares of a mortgage investment corporation (MIC) where a connected person (e.g., major shareholder or related entity) also has personal indebtedness to the MIC. Under the new rules, those shares may be “prescribed property” making them prohibited investments. If held, the plan could incur the 50% fair market value tax plus full taxation on gains or income.
If those assets are transferred out or sold before **July 1, 2026**, the plan can avoid these special taxes. After that date, even passive income from such holdings could trigger large adverse tax consequences.
## Conclusion
Trustees and holders of registered plans should take immediate action to assess and restructure their portfolios ahead of July 2026. This transition period offers a window of opportunity to avoid steep penalties. Getting ahead of these compliance changes will protect both beneficiaries and plan administrators from unintended damage.