30 September 1997 Internal T.I. 9725666 - ACQUIRED PROPERTY FOR PURPOSE OF 94(1)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Application of subsection 94(1) where investment funds are provided to a non-resident corporation owned by a non-resident trust.

Position:

Subsection 94(1) applies.

Reasons:

Law is clear and result is consistent with purpose.

		September 30, 1997

International Tax Directorate				International Section
J. Stalker
									957-2118
	Attn: René Fleming
      A/Manager, Policy & Procedure
		972566

Acquired Property for the Purpose of Subsection 94(1) of the Income Tax Act (Canada) (the "Act")

We are writing in response to your memorandum of September 23, 1997 to confirm your understanding of the application of subsection 94(1) of the Act to certain foreign trust arrangements.

Sample Arrangement

A non-resident settlor forms a non-resident trust by contributing a nominal amount (say $100). The trust uses the nominal amount to acquire common shares of a non-resident corporation. The Canadian resident beneficiaries of the trust provide a significant amount of investment funds (say $1,000,000) to the non-resident corporation in exchange for either loans or preferred shares from the non-resident corporation.

Issue

Do the rules in subsection 94(1) of the Act apply to tax foreign accrual property income (FAPI) earned by the non-resident corporation?

Position

Subsection 94(1) will apply to tax FAPI earned by the non-resident corporation, since a beneficiary of the trust is resident in Canada, and a non-resident corporation that would be a controlled foreign affiliate of the non-resident trust if the trust were resident in Canada has acquired property (the investment funds) from the Canadian resident beneficiary.

While with respect to the situation set out above it is arguable that the Canadian resident beneficiaries did not contribute property to the non-resident trust, subsection 94(1) does not require a contribution of property to the trust. Instead subsection 94(1) applies where the non-resident corporation in the situation at hand (or the trust itself in another scenario) acquires property from the Canadian resident beneficiary (or from another person referred to in clause 94(1)(b)(i)(A) or (B)).

Not only is this position in accordance with the plain meaning of the words, as confirmed by the Department of Finance the result is consistent with the purpose of subsection 94(1).

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch