19 December 2002 External T.I. 2002-0151195 - FOREIGN PROPERTY FOR DIPS

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:

1. Does a company have to be incorporated in Canada to be a Canadian corporation?

2. Does a company have to establish a "substantial Canadian presence" ? If so, how?

3. Does a company have to have directors in Canada?

4. Does a company have to satisfy all of the above?

Position:

1. Yes

2. Yes, if it is a Canadian corporation that derives its value primarily from foreign property. The tests are set out in the legislation

3. Not expressly
4. Not necessarily - question of fact

Reasons:

General information provided based on legislation.

2002-015119
XXXXXXXXXX Renée Shields
(613) 948-5273
December 19. 2002

Dear XXXXXXXXXX:

Re: "Canadianization" of a Company

This is in response to your letter received by the Income Tax Rulings Directorate on July 9, 2002 inquiring about how to "Canadianize" a company for purposes of the foreign property limitations imposed on registered pension plans (RPPs) or registered retirement savings plan (RRSPs).

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.

Part XI of the Income Tax Act (the Act) imposes a tax on a trust governed by a deferred income plan, such as an RRSP or an RPP, where the cost amount of foreign property held exceeds 30% of the cost amount of all of the property held. Whether a share of any particular corporation is foreign property at any particular time is a question of fact. The CCRA's general views regarding foreign property are expressed in Interpretation Bulletin IT-412R2 entitled "Foreign property of registered plans". We can also provide you with the following general comments with respect to each of your inquiries.

Question 1: Does a company have to be incorporated in Canada?

Subsection 206(1) of the Act defines "foreign property" for the purposes of Part XI of the Act. Paragraph (d) of the definition provides that any share of the capital stock of a corporation other than a Canadian corporation is foreign property.

Subsection 89(1) of the Act defines "Canadian corporation". The definition states:

"Canadian corporation" at any time means a corporation that is resident in Canada at that time and was

(a) incorporated in Canada, or

(b) resident in Canada throughout the period that began on June 18, 1971 and that ends at that time,
and, for greater certainty, a corporation formed at any particular time by the amalgamation or merger of, or by a plan of arrangement or other corporate reorganization in respect of, 2 or more corporations (otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of the property by the other corporation or as a result of the distribution of the property to the other corporation on the winding-up of the corporation) is a Canadian corporation because of paragraph (a) only if

(c) that reorganization took place under the laws of Canada or a province, and

(d) each of those corporations was, immediately before the particular time, a Canadian corporation.

The requirement of residency in paragraph 89(1) of the foregoing definition may be met pursuant to the deeming rules in subsection 250(4) of the Act or through meeting the criterion that central management or control is exercised in Canada. You may wish to refer to Information Bulletin IT-391R entitled "Status of Corporations" for a discussion of corporate residence.

It should be noted that subsection 250(5.1) of the Act provides that a corporation incorporated in one jurisdiction and continued under another is deemed to have been incorporated in the jurisdiction of continuance.

Question 2: Does the company have to establish a "substantial Canadian presence"?

Pursuant to paragraph 206(1)(d.1) of the Act, shares of a Canadian corporation can nonetheless be considered foreign property if such shares can reasonably be considered to derive their value, directly or indirectly, primarily from foreign property.

Subsection 206(1.1) of the Act allows such a Canadian corporation to be exempted from being considered foreign property if it demonstrates substantial Canadian presence. Paragraphs 206(1.1)(a) to (e) of the Act provide the 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.

Question 3: Does the company have to have directors in Canada?

As noted above, a "Canadian corporation" is a corporation that is resident in Canada. Paragraph 15 of IT-391R points out that that common law has generally established that a corporation is resident in the country in which its central management and control is exercised. The residency of the directors may be relevant in determining the residency of the corporation.

Question 4: Does the company need to satisfy all 3 of the foregoing requirements?

As pointed out previously, only if the shares of a Canadian corporation derive their value from foreign property does the issue of substantial Canadian presence arise. The substantial Canadian presence tests do not apply in respect of shares of a foreign corporation that are clearly foreign property.

We trust that these comments will be of assistance.

Yours truly,

Mickey Sarazin, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch