8 March 2000 External T.I. 2000-0003885 - EXCHANGEABLE SHARE FOREIGN PROPERTY

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: Would a share that meets 206(1)(d.1) be a foreign property if it is excluded under 206(1)(f) of the same definition?

Position: No.

Reasons: Each of the paragraphs of the definition of foreign property is applied separately.

XXXXXXXXXX 		2000-000388
M. P. Sarazin
Attention: XXXXXXXXXX 

March 8, 2000

Dear Sirs:

Re: Exchangeable Shares as Foreign Property

This is in response to your letter dated January 21, 2000, wherein you requested our views as to whether exchangeable shares of a Canadian corporation that derive their value from the shares of a foreign parent corporation would be considered foreign property where paragraph 206(1)(d.1) of the definition of foreign property in the Income Tax Act (the "Act") applies to the shares but paragraph 206(1)(f) of the definition of foreign property the Act does not apply to the shares.

You have argued that paragraph 206(1)(d.1) is a general provision and paragraph 206(1)(f) is a specific provision and, under the generally accepted principle of statutory interpretation, the general provision should not take precedence over the specific provision. Consequently, even though shares would be considered foreign property under paragraph 206(1)(d.1) of the definition of foreign property in the Act, the shares would not be foreign property because the exclusion under paragraph 206(1)(f) of the definition of foreign property takes precedence. You have also argued that, while the attributes of the exchangeable shares are designed to entitle the holder to the economic equivalence of holding a share of the foreign parent corporation, the shares are issued by a Canadian corporation and, as such, must derive their value from the Canadian corporation.

Comments

In your letter you have outlined what appears to be an actual fact situation related to completed transactions. We must advise you that the review of such transactions is the responsibility of tax services offices. As noted in Information Circular 70-6R3 (available at your local tax services office or on the internet at www.ccra-adrc.gc.ca/formspubs/menu-e.html), this directorate can only provide an opinion concerning the tax consequences associated with specific proposed transactions in the form of an advance income tax ruling. Consequently, we can only provide you with the following general comments.

Subsection 206(1) of the Act defines "foreign property" for the purposes of Part XI of the Act. Any property that is described in any of paragraphs 206(1)(a) to (i) of the definition of "foreign property" will be considered foreign property for purposes of Part XI of the Act. Whether a share of any particular corporation is a foreign property at any particular time is a question of fact.

Where a property is described in any one of the paragraphs within the definition of foreign property, the particular property would constitute foreign property for purposes of Part XI of the Act. In our view, each of the paragraphs in the definition of foreign property is applied independently from the other paragraphs within the definition of foreign property. Consequently, we do not accept your argument that, under the generally accepted principle of statutory interpretation, one paragraph within the definition of foreign property in subsection 206(1) of the Act takes precedence over another paragraph within the same definition. Acceptance of your argument would result in all shares of Canadian corporations being excluded from the foreign property definition because of paragraph 206(1)(d) of the Act which is obviously not the intent of the legislation.

The determination of whether a share derives its value, directly or indirectly, primarily from foreign property for purposes of paragraph 206(1)(d.1) of the definition of foreign property is a question of fact. Where the rights attached to shares of a Canadian corporation that are exchangeable into shares of the foreign parent corporation entitle the holder to certain voting rights in the foreign parent, dividends which are based on dividends and market price changes of the foreign parent's shares and no general voting rights in respect of the Canadian corporation, we believe it would be reasonable to conclude that the shares derive their value, directly or indirectly, primarily from the shares of the foreign parent corporation.

We trust the above comments will be of assistance to you.

Yours truly,

Patricia Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch