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.
Principal Issues: A credit union invests in shares or long-term debt of a wholly-owned subsidiary of a second credit union. The first credit union is a member or shareholder of both the second credit union and the subsidiary; however, the subsidiary is not a credit union. Is the investment an eligible investment of the first credit union within the meaning of subsection 181.3(5)? Will it make a difference if the subsidiary was created to carry out functions previously carried out by the second credit union?
Position: The shares and long-term debt of the subsidiary are not eligible investments of the first credit union unless the two entities are related. In assessing whether the two entities are related, paragraph 181.3(5)(b) would not apply to deem the credit union to be related to a person who controls the subsidiary within the meaning of subparagraph 251(2)(b)(iii). The functions of the subsidiary are not relevant in this regard.
Reasons: The legislation. Paragraph 181.3(5)(a) requires that the credit union be related to the subsidiary if the subsidiary's shares or long-term debt are to be eligible investments of the credit union. Paragraph 181.3(5)(b) applies for purposes of subsection 181.3(4) only.
XXXXXXXXXX 2004-009107
R. Maley
November 1, 2004
Dear XXXXXXXXXX:
Re: Subsection 181.3(5) of the Income Tax Act (the "Act")
This is in reply to your letter of August 16, 2004 asking for our views on the application of subsection 181.3(4) to certain investments made by a credit union in a corporation that is a wholly-owned subsidiary of another credit union in which the particular credit union is a member. The subsidiary is not a credit union for purposes of the Act but we are inferring from your letter that it is otherwise a "financial institution" within the meaning of subsection 181(1) of the Act.
The particular situation outlined in your letter relates to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, 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 Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.
Pursuant to paragraph 181.3(4)(a), the investment allowance of a credit union which was resident in Canada at any time of the year is the total of all amounts, each of which is the carrying value at the end of the year of an "eligible investment" of the corporation. Paragraph 181.3(5)(a) provides that an eligible investment of the credit union is a share or long-term debt of a related financial institution (other than a financial institution that is exempt from tax under Part I.3 of the Act or a financial institution that is not resident in Canada or using the proceeds of the share or debt in a business carried on by it in Canada through a permanent establishment). For purposes of subsection 181.3(4) only, paragraph 181.3(5)(b) deems a credit union and another credit union of which it is a shareholder or member to be related to each other.
Subparagraph 251(2)(b)(i) of the Act provides, for purposes of the Act, that a corporation is related to a person who controls it. Therefore, the subsidiary would appear to be related to the other credit union. Subparagraph 251(2)(b)(iii) provides that a corporation is also related to any person who is related to the person who controls it. However, as paragraph 181.3(5)(b) applies for purposes of subsection 181.3(4) only (and not for purposes of subsection 251(2)), paragraph 181.3(5)(b) would not deem the two credit unions to be related for purposes of subsection 251(2). Therefore, the subsidiary's shares and long-term debt would not be eligible investments of the credit union unless the credit union and subsidiary are otherwise related within the meaning set out in subsection 251(2).
In view of the policy concerns you have expressed with respect to this outcome, we suggest that you consider raising this issue with the Department of Finance, which is responsible for issues pertaining to tax policy. The Tax Policy Branch of that Department can be contacted by writing to the attention of the Associate Deputy Minister of Tax Policy, Department of Finance, L'Esplanade Laurier,140 O'Connor Street, 16th Floor, East Tower, Ottawa ON, K1A 0G5.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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