6 June 2003 Internal T.I. 2003-0011507 - Phase-out of NRO 134.1

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: Several related issues regarding the phase-out of NROs

Position: See Memo

Reasons: See Memo

June 6, 2003

Rick Power International Section III
International Tax Directorate Sophie Chatel
344 Slater Street, 5th Floor (613) 957-2118
Canada Building
Ottawa ON K1A 0L5
2003-001150

Phase-out of NROs - Section 134.1 of the Income Tax Act (the "Act")

We are writing in response to your e-mail sent on April 1, 2003, requesting our comments on the application of section 134.1 of the Act. You asked us the following questions:

Does Section 134.1 apply to an existing NRO in its last taxation year commencing before 2003?

Section 134.1 does not apply during the last taxation year of an NRO since it remains an NRO as defined in subsection 133(8) for that year in the absence of the application of section 134.1. Section 134.1 deems a corporation to be an NRO after the corporation would otherwise cease to be an NRO pursuant to subparagraph (i)(ii) of the definition in subsection 133(8), but for specific purposes only. Since the amended definition of "non-resident-owned investment corporation" in subsection 133(8) would otherwise provide for the phase-out of NROs by the end of the corporation's last taxation year that begins before 2003, a corporation that ceases to be an NRO would not be able to claim a refund of the 25% refundable tax that it would pay in respect of its last taxation year as an NRO. To accommodate the refund for this tax, paragraph 134.1(1)(c) provides an election through which a corporation that would otherwise cease to be an NRO can elect to have its status as an NRO extended for this specific purpose for its first non-NRO year. In order to access the refund, subsection 134.1(2) provides that the dividends paid in the first non-NRO year must be paid to a non-resident person or another NRO.

For example, if an NRO would otherwise cease to be an NRO after year 1, it can make an election by its filing due date for year 2 to remain an NRO for year 2 as provided in subsection 134.1(2) for the specific purpose of claiming the 25% refundable tax that it had paid in its last taxation year (year 1) as an NRO.

Do NROs have to file their first year after they cease to be an NRO?

The former NRO has to file a normal Canadian corporate income tax return just as any other Canadian corporation would for the first year after it ceases to be an NRO. However, if the former NRO has allowable refundable tax on hand and pays a dividend to a non-resident person in the first non-NRO year, the former NRO has to make an election under 134.1 in order to access the refund of the allowable refundable tax on hand (i.e., the 25% tax paid as an NRO).

Are they allowed to file under the transitional rule for more than one year?

No.

What are the conditions for an NRO to meet the special transitional rules (Section 134.1)?

The requirements for the application of 134.1 are:

(1) the corporation was an NRO in a taxation year (year 1);

(2) the corporation is not an NRO in the following taxation year (year 2); and

(3) the corporation makes an election in writing to have section134.1 apply for its first non-NRO year (year 2).

When is the phase-out of NROs?

By virtue of subparagraph (i)(ii) of the definition of "non-resident-owned investment corporation" in subsection 133(8), existing NROs will be entitled to retain their status until the end of their last taxation year that begins before 2003. For example, if an NRO has a December 15 year-end, the last year of NRO status would be the year that started on December 16, 2002 and ends on December 15, 2003.

However, even if the NRO is phased-out for the year ending on December 15, 2004, if it has allowable refundable tax on hand and it pays a dividend in that year to a non-resident, the NRO would be able to make an election to be treated has an NRO but only for the specific purpose of claiming a refund for the 25% tax paid as an NRO.

We trust our comments are helpful.

Olli Laurikainen
Section Manager
for Division Director
International Section
Income Tax Rulings Directorate
Policy and Legislation Branch
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