24 October 2001 External T.I. 2001-0101165 - DEFINITION OF CAPITAL

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 CCRA.

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

Principal Issues: We are asked for comments on the application of Part I.3 to a CCPC that has invested in a REIT in Canada and in a similar entity in the United States.

Position: The application of Part I.3 would depend upon the nature of the interest held by the CCPC. In general, a corporation that has a beneficial interest in a trust would not include in its own capital any amount in respect of the trust's assets and liabilities. Where the entity that issued the interest to the corporation was created in another jurisdiction, the nature of the interest would generally be determined having regard to the law of the applicable jurisdiction under the circumstances.

Reasons: Subsection 181.2(3).

XXXXXXXXXX 							2001-010116
R. Maley
October 24, 2001

Dear XXXXXXXXXX:

Re: Request for Technical Interpretation - Part I.3 of the Income Tax Act

This is in reply to your letter of September 12, 2001 asking for our comments on the appropriate application of Part I.3 of the Act to a CCPC that invests in a REIT in Canada or in a similar structure resident in the United States. In particular, you have asked whether the CCPC is required to include the liabilities of the REIT or US entity in computing its capital subject to tax.

The particular circumstances in your letter on which you have asked for our views appears to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. However, we are prepared to offer the following general comments which may be of assistance.

A corporation, other than a financial institution, computes its capital pursuant to subsection 181.2(3) of the Act. Included in this amount are the capital stock, retained earnings and surpluses of the corporation, loans and advances to the corporation, and most other indebtedness of the corporation. Where the corporation is a member of a partnership, the corporation must also include in its capital a proportion of the partnership's capital equal to the corporation's share of the partnership income or loss for the period. In this regard, the partnership's capital is computed as if paragraphs 181.2(3)(b) to (d) and (f) had applied to the partnership in the same manner as they apply to corporations. In general, a corporation would not include in computing its capital under subsection 181.2(3), the underlying liabilities and assets of a trust in which it has a beneficial interest.

The nature of a corporation's relationship with a particular entity depends upon the circumstances including the terms of any agreements between the corporation and the particular entity. Where the nature of a particular interest held by the corporation is at issue because the entity is resident in another jurisdiction, e.g., is it share capital, debt, a partnership interest, a beneficial interest in a trust etc., reference should be had to the law of the applicable jurisdiction under the circumstances.

While the foregoing comments are not binding on the Canada Customs and Revenue Agency, we trust that they assist.

F. Lee Workman
Section Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate