28 March 2002 External T.I. 2002-0122965 - 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 CCRA.

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

Principal Issues: Are shares of a particular corporation that migrated from Canada foreign property? If yes is the cost amount of the shares determined at the time the shares were acquired or at the time they become foreign property?

Position: It is a question of fact whether a share of a corporation is a foreign property, but in the particular case, the website of the corporation states its shares are foreign property. The cost amount of a share held as a capital property is based on the ACB of the share, which is, in turn, based on the cost of the share when it was acquired.

Reasons: Review of available facts. There are no provisions to adjust the cost amount when a share becomes a foreign property

2002-012296
XXXXXXXXXX Karen Power, CA
(613) 957-8953
March 28, 2002

Dear XXXXXXXXXX:

Re: Penalty Tax on Excess Foreign Property Held in Registered Plans

This is in reply to your facsimile dated November 26, 2001 and which was not received by the Directorate until February 12, 2002, requesting our comments on a penalty tax assessed under Part XI of the Income Tax Act (the "Act") on excess foreign property.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4 entitled Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax service office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency.

Under Part XI of the Act, a registered retirement savings plan ("RRSP") and a registered retirement income fund ("RRIF") (hereinafter collectively referred to as the "Plans") are generally subjected to a special tax when the cost amount of its foreign property exceeds 30% (formerly 20%) of the cost amount of all property held by the Plan.

Whether a share of any particular corporation is a foreign property (as defined in the Act) at any particular time is a question of fact. A share of a foreign corporation is a "foreign property" for purposes of Part XI of the Act. Consequently, the cost of a share of a foreign corporation held by a Plan will be included in the cost amount of the foreign property held by the Plan for the purposes of determining whether the Plan will be subjected to taxes under Part XI of the Act. In addition, a share of a Canadian corporation may itself be a foreign property where it is reasonable to consider that the share derives its value primarily from foreign property.

As you have indicated, this penalty tax appears unfair, where a taxpayer has never purchased a share of a foreign corporation. For this reason the Act provides, in certain situations, relief from the imposition of the foreign property penalty tax in respect of property that was not foreign property when it was acquired, but that subsequently becomes foreign property, by not treating such property as foreign property for up to 24 months. This relieving provision provides the taxpayer with a period of 24 months in which to dispose of the foreign property before the penalty tax will apply.

As indicated in our previous correspondence (document #2001-009856), we are unable to determine based on the information you have provided and the limited material we have been able to obtain over the Internet, at what time the shares of XXXXXXXXXX became foreign property for purposes of the Act. Consequently we are unable to determine when the Part XI penalty became applicable and whether relief was available in your situation. Again we would suggest that you seek the opinion of counsel to determine when your shares became foreign property.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

Mickey Sarazin, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch