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: Whether a particular series of transactions would be governed by section 86 of the Act

Position: Yes

Reasons: see attached interpretation

XXXXXXXXXX 	2000-004807
		Tim Kuss
February 22, 2001

Dear XXXXXXXXXX:

Re: Returns of Capital from Foreign Affiliates
Technical Interpretation

This is in reply to your letter requesting a technical interpretation regarding the following hypothetical situation.

Background Information

Canco is a corporation resident in Canada. Canco has invested in the common shares of a foreign affiliate (FA), with substantially all of the invested funds represented by share premium or contributed surplus (rather than statutory paid-up capital) under the corporate laws of the country in which FA is organized and resident. The shares are capital property of Canco. Under the laws of that country, returns of capital can only be effected by distributions of share premium or contributed surplus. Such distributions are neither dividends nor reductions of statutory paid-up capital as a matter of the relevant foreign corporate law.

FA undertakes a reorganization of capital, whereby the following steps are completed:

1. The articles of association or other constating documents of FA are amended to authorize a new class of common shares.

2. Canco surrenders all of the common shares held by it to FA, for fair market value consideration consisting of the issue, by FA, of (i) a promissory note, and (ii) common shares from the newly authorized class.

Technical Interpretation

We confirm that the above transactions would be governed by section 86 of the Act.

In accordance with paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, technical interpretations are not income tax rulings and are not binding on the Canada Customs and Revenue Agency.

Yours truly,

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