22 July 2002 Internal T.I. 2002-0152647 - Foreign Investments

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: Translation of Technical Interpretation 2002-013183.

Position: N/A

Reasons: N/A

July 22, 2002

	XXXXXXXXXX  	Income Tax Rulings Directorate
	Client Services	International and Trusts Division
	XXXXXXXXXX  Tax Services Office 	International and Trusts Section
	Éric Allard-Pouliot
Tel. 613-957-2097

2002-015264

	Subject: Technical Interpretation Request
		      Translation of Technical Interpretation 2002-013183

This is in reply to your electronic message of July 17, 2002, regarding the above-noted subject. More specifically, you have requested that we provide you with an English translation of the reply sent to XXXXXXXXXX in file #2002-013183. As requested, you will find enclosed herewith an English translation of the said document.

for Director
International and Trusts Division
Income Tax Rulings Directorate

XXXXXXXXXX 								2002-013183
	Éric Allard-Pouliot
July 8, 2002

Dear XXXXXXXXXX:

Subject: Technical Interpretation Request
Investments Held Outside Canada

This is in reply to your request to XXXXXXXXXX of the XXXXXXXXXX Tax Services Office regarding the above-noted subject. More particularly, you inquire as to what would be the applicable Canadian tax treatment of certain investments that you hold in France.

Although this information is not provided in your request, you mentioned in a recent phone conversation (Godin/XXXXXXXXXX) that you obtained your Canadian residency in 1997 and are currently a Canadian citizen. In light of the information provided, it appears that you hold certain investments in France that generate either interest income, capital gains or losses upon their disposition, or a combination of both. According to the information provided, one of these investments appears to be a life insurance policy. It also flows from your request that some of these investments are not taxable in France. You would like to know whether the income and/or the gains attributable to these investments are taxable in Canada.

The facts submitted in your request do not allow us to determine the exact nature of these investments and, consequently, to conclusively determine their tax treatment. However, we are prepared to offer the following general comments which may be of assistance to you.

Comments

Interest Income

Pursuant to sections 2 and 3 of the Income Tax Act (the "Act"), Canadian residents are taxable on their worldwide income. Hence, any income of a Canadian resident, whether from a source located in Canada or not, is taxable under the Act, subject to the application of a tax treaty to which Canada is party.

In this regard, paragraph 12(1)(c) of the Act provides that there shall be included in computing the income of a taxpayer from a business or property, any amount received or receivable by the taxpayer in the year (depending on the method regularly followed by the taxpayer in computing his income) as, on account of, in lieu of payment of or in satisfaction of, interest to the extent that the interest was not included in computing his income for a preceding taxation year. Although paragraph 12(1)(c) of the Act allows a taxpayer to report his interest income on a cash basis, i.e. when it is received, this provision is subject, among others, to subsection 12(4) of the Act.

Pursuant to subsection 12(4) of the Act, for taxation years beginning after 1982, an individual who holds an interest in an investment contract acquired before 1990 on any third anniversary of the contract, must report his income interest in respect of this contract on the accrual basis on any third anniversary of the contract to the extent that such interest was not otherwise included in computing his income for the taxation year or any preceding taxation year (for example, when the interest income is received pursuant to paragraph 12(1)(c)). An investment contract means, pursuant to subsection 12(11) of the Act, any debt obligation other than those specifically excluded. The term "debt obligation" is considered to include, for example, bank accounts, term deposits, guaranteed investment certificates, Canada Savings Bonds, mortgages, corporate bonds and loans (for more information regarding paragraph 12(1)(c) and subsection 12(4) of the Act, please refer to Interpretation Bulletin IT-396R, a copy of which is enclosed herewith).

As a result, subject to the provisions of a tax treaty to which Canada is party, any interest income received or receivable by a Canadian resident, notwithstanding where it comes from, must be included in computing his income under the Act either pursuant to paragraph 12(1)(c) or subsection 12(4). It is to be noted that the amount that must be so included in computing the taxpayer's income is the amount received or receivable by the taxpayer as interest, without reference to any credit, tax or deduction to which this amount might be subject in a foreign tax jurisdiction.

Paragraph 1 of Article XI of the Canada-France Tax Convention (the "Convention"), which applies to interest income, provides that "[I]nterest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State." For the purposes of the Convention, the term "interest" means income from debt-claims of every kind and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. The Convention thereby allows Canada to tax interest income arising in France and paid to residents of Canada, whether this income is taxable in France or not.

Capital Gains

Pursuant to section 3 of the Act, a person resident in Canada must also include in computing his income his taxable capital gains for the year from dispositions of property, subject to the application of a tax treaty to which Canada is party. In this regard, paragraph 4 of Article XIII of the Convention provides that "[G]ains from the alienation of any property other that that referred to in paragraphs 1, 2 and 3, shall be taxable only in the Contracting State of which the alienator is a resident." The properties referred to in paragraphs 1, 2 and 3 of Article XIII of the Convention are immovable properties, certain business properties, certain ships or aircrafts, and the shares, interests or other rights in a corporation, a partnership or a trust the assets of which consist principally of immovable property. Therefore, assuming that the gains realized with respect to the investments that you hold in France do not come from the disposition of any of those properties, they are taxable in Canada and must be reported in Schedule 3 of your income tax return.

Life Insurance Policy

Pursuant to subsection 12.2(1) of the Act, when a taxpayer holds an interest in a life insurance policy last acquired after 1989, such a taxpayer is generally required to include in computing income for the year the excess of the accumulating fund in respect of his interest in the policy on that day over the adjusted cost basis to the taxpayer of that interest on that day. Subsection 12.2(1) of the Act applies to any taxpayer who, in a taxation year, holds an interest in a life insurance policy.

The term "life insurance policy" is broadly defined in subsection 138(12) of the Act. In addition to a regular life insurance policy, it includes, among other things, annuity contracts. Whether a particular product constitutes a life insurance policy for the purposes of the Act is a question of fact and law. However, where a product does not provide for a death benefit and does not constitute an annuity arrangement, it may suggest that it is not a life insurance policy within the meaning of subsection 138(12) of the Act (in such a case, the particular product may well constitute an investment contract as defined in subsection 12(11) of the Act). It is also to be noted that the residence of the insurer is not relevant in determining whether an insurance policy constitutes a life insurance policy within the meaning of subsection 138(12) of the Act. Hence, an insurance policy issued by a non-resident insurer can constitute a life insurance policy for the purposes of the Act.

In general terms, the "accumulating fund" of a life insurance policy is a measure of the accumulated savings that have built up within the policy. To calculate the accumulating fund, it is necessary to refer to section 307 of the Income Tax Regulations. The "adjusted cost basis" to a policyholder of an interest in a life insurance policy is defined in subsection 148(9) of the Act. It is essentially the cost of the interest in the policy adjusted for certain items. Further information regarding the calculation of the "accumulating fund" of a life insurance policy and the "adjusted cost basis" to a policyholder of an interest in a life insurance policy can be found in Interpretation Bulletin IT-87R2, a copy of which is enclosed herewith.

When a policyholder disposes of an interest in a life insurance policy, the rules in paragraph 56(1)(j) and subsection 148(1) of the Act apply. These rules require the policyholder to include in income for the taxation year in which the disposition occurs the amount, if any, by which the proceeds of disposition of the policyholder's interest that the policyholder, beneficiary or assignee is entitled to receive in the year exceed the adjusted cost basis to the policyholder of that interest immediately before the disposition. When a policyholder disposes of an interest in a life insurance policy for which income has been reported (for example, in accordance with subsection 12.2(1)), double taxation of such income does not occur because the amount of income that has already been reported increases the adjusted cost basis of the policy. Since the income from a life insurance policy is not covered by any specific provision of the Convention (Article XVIII of the Convention only applies to war pensions and allowances, whereas Article XXIX's application is restricted to contributions to certain pension plans), it is subject to Article XXI of the Convention. Pursuant to this provision, items of income of a resident of a Contracting State which are not expressly mentioned in the foregoing Articles of the Convention are taxable only in that State. With respect to the gain realized upon the disposition of an interest in a life insurance policy, it will generally be subject to Article XIII of the Convention (see the comments under the Capital Gains Heading), which provides that such gains are only taxable in the Contracting State of which the alienator is a resident. Therefore, the provisions of the Convention do not modify the tax consequences previously mentioned with respect to life insurance policies.

Finally, it is to be noted that an interest in a life insurance policy issued by a non-resident insurer could constitute a "specified foreign property" within the meaning of subsection 233.3(1) of the Act. Pursuant to section 233.3 of the Act, a taxpayer who is resident in Canada during a taxation year and who holds specified foreign properties the total cost of which to the taxpayer exceeds $100,000 at any time in the year, is required to file a prescribed form (Form T1135) by that taxpayer's normal tax return filing deadline for that taxation year.

Foreign Tax Credit and Deduction

In order to avoid double taxation of certain income or gains, the Act provides for a foreign tax credit mechanism. Generally speaking, this credit allows for a deduction against the income tax payable with respect to income or gains from foreign sources of the foreign taxes paid with respect to such income. In certain circumstances, pursuant to subsections 20(11) and (12) of the Act it is also possible for a taxpayer to obtain, in computing his income, a deduction for the income or profits tax paid to a foreign government. In this regard, you will find enclosed herewith copies of Interpretation Bulletins IT-270R2, IT-395R and IT-506 that relate to the foreign tax credit and deduction.

Although the comments provided herein do not constitute an advance income tax ruling that is binding on the Canada Customs and Revenue Agency, we trust that they will be of assistance to you.

Alain Godin, Manager
International & Trusts Section
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch