9 November 2000 External T.I. 2000-0050725 - US SHARES, 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: Where shares of a U.S. company held by an RRSP are exchanged for shares of a Canadian company, can the Part XI taxes relating to the U.S. shares be refunded for the 15 months preceding the exchange?

Position: No.

Reasons: Part XI is computed based on the foreign property held at the end of each month. There is no provision exempting foreign property from being foreign property for a 15 month period.

XXXXXXXXXX 2000-005072
M. P. Sarazin
Attention: XXXXXXXXXX

November 9, 2000

Dear Sir\Madam:

Re: Refund of Part XI Taxes

This is in reply to your letter of October 3, 2000, requesting our views regarding the refund of taxes previously paid under Part XI of the Income Tax Act (the "Act") where a registered retirement savings plan ("RRSP") exchanges shares that were considered foreign property for shares that are Canadian property for purposes of Part XI of the Act.

Your client's RRSP held shares of a company incorporated in the United States. These shares were foreign property for purposes of Part XI of the Act and your client's RRSP was subjected to tax under Part XI of the Act. In XXXXXXXXXX, the shares of the U.S. company held by the RRSP were exchanged for shares of a related Canadian corporation that were not foreign property for purposes of Part XI of the Act. Your client has requested a refund of the Part XI taxes that related to the shares of the U.S. company held by the RRSP for the 15 month period preceding the date of the exchange of shares. Your client has argued that subsection 206(1.1) of the Act results in the shares of the U.S. company being considered Canadian property for the 15 month period preceding the exchange and, as such, the RRSP should not have paid any Part XI taxes on the cost amount of those shares in that period.

Comments

In your letter you have outlined an actual fact situation related to completed transactions. As noted in Information Circular 70-6R3 (information circulars and interpretation bulletins are 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 advance income tax rulings in respect of specific proposed transactions. We must advise you that the review of completed transactions falls within the responsibility of tax services offices. Consequently, we can only provide you with the following general comments.

The Canada Customs and Revenue Agency's general views regarding foreign property are expressed in Interpretation Bulletin IT-412R2 titled "Foreign property of registered plans". Certain properties that are considered foreign property for purposes of the Act are described in paragraph 3 of IT-412R2. In paragraphs 3(a) and 3(e) of IT-412R2, we state that a share of a corporation other than a Canadian corporation and a share of a Canadian corporation that derives its value, directly or indirectly, primarily from foreign property are considered foreign property for purposes of the Act. Consequently, shares of a corporation incorporated in the United States are considered foreign property and shares of a Canadian corporation may, in certain circumstances, be foreign property. We note that the determination of whether a Canadian corporation derives its value, directly or indirectly, primarily from foreign property is a question of fact.

Subsection 206(1.1) of the Act is not discussed in IT-412R2 because it was enacted subsequent to the date IT-412R2 was issued. This provision allows a Canadian corporation that derives its value, directly or indirectly, primarily from foreign property to be exempted from being considered foreign property where it has a substantial Canadian presence. Paragraphs 206(1.1)(a) to (e) of the Act provide five tests for establishing substantial Canadian presence. If any one of the tests is satisfied then the Canadian corporation will be excluded from being foreign property even though it derives its value, directly or indirectly, primarily from foreign property. Some of these tests make reference to a 15 month period but they are only relevant in respect of the Canadian corporation's status as foreign property for purposes of Part XI of the Act. To summarize, these substantial Canadian presence tests apply in determining whether the shares of a Canadian corporation are foreign property and they do not apply in respect of shares of a U.S. corporation which are clearly foreign property, as discussed above.

Part XI applies where the cost amount of the foreign property held by an RRSP at the end of any month exceeds 20% of the cost amount of all of the property held by the RRSP at that time. The computation of the tax is based on the cost amount of the foreign property held at the end of each month. The shares of the U.S. company held by the RRSP will be relevant for each month prior to the month in which the exchange takes place and the shares of the Canadian company received in exchange for the U.S. company shares will be relevant for the month that the exchange takes place and each subsequent month that the shares are held by the RRSP.

We trust that our comments will be of assistance.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate