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 we revisit the comments provided in file 991350 regarding rights to royalties?
Position: No.
Reasons: The position in file 991350 was based on the limited information provided in the incoming letter and the author has not provided any additional information.
XXXXXXXXXX 2000-002494
Attention: XXXXXXXXXX
May 17, 2000
Dear Sirs:
Re: The Expression "Invest Funds in the Corporation"
This is in response to your request of May 9, 2000, for a reply to a tax practitioner's criticism of our interpretation (file #9913505).
Our interpretation dealt with a proposed investment to be offered by a taxable Canadian corporation. The corporation would provide the investor with a right to royalty payments based on future sales generated by the corporation. We concluded that a right to royalties would not be a qualified investment within the meaning assigned by subsection 146(1) of the Income Tax Act (the "Act").
The critic has argued that an investment in the corporation can only be by way of shares or debt and it is possible that such an investment may be a qualified investment for purposes of the Act.
As noted in paragraph 22 of Information Circular 70-6R3, the Rulings Directorate will provide, in writing, technical interpretations of specific provisions of income tax law. The technical interpretations are general comments provided with respect to the limited information provided in the incoming letters.
The Canada Customs and Revenue Agency's general views with respect to qualified investments are found in Interpretation Bulletin IT-320R2. We note that paragraph 3(c) of IT-320R2 states very clearly that shares and debt obligations of corporations listed on a prescribed stock exchange in Canada are qualified investments. Paragraph 15 of IT-320R2 discusses shares of eligible corporations. Subsection 4900(12) of the Income Tax Regulations also describes shares of a small business corporation that qualify as an investment for a registered retirement savings plan. Based on the information available, the investment described in the above request for an interpretation did not appear to involve such a share or debt, nor would we expect this to be the issue.
Since the incoming letter from the taxpayer referred to an investment to be offered by a corporation which would provide the investor with a right to royalty payments, we concluded the investment was something other than shares or debt of the corporation. The critic says that since we went on to say the taxpayer would invest funds in the corporation this assumption was wrong as you can only invest in a corporation by way of shares or debt. The critic also says the wording confused my staff, an insinuation and inaccurate conclusion which I resent.
We disagree with the critic since his conclusion is that the investment is probably a share or debenture on which the holder's return is pegged to the royalty earnings. In our view, this is questionable since tying the return of dividends or interest to the royalty earnings would not give the investor a right to royalty payments.
However, it is not necessary to further debate whose assumption of what was in the taxpayer's mind has more merit since the critic is not disagreeing with our interpretations of the law provided in the letter. We are not sure what the critic's point is.
In the above situation, we could only provide general comments. However, we note that the issue could be revisited in the context of an advance income tax ruling where all of the relevant facts are made available.
Yours truly,
C. Brian Darling
Director
Financial Industries Division
Income Tax Rulings Directorate
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