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: What are the foreign reporting requirements and tax implications for a Canadian resident holding certain foreign investments?
Position: Provided general comments.
Reasons: Since the terms and conditions associated with the particular foreign investments are unknown, we are not able to provide definitive comments. General comments provided on the foreign property reporting requirements in section 233.3 of the Act.
XXXXXXXXXX 2008-028844
S. Bernards
September 29, 2009
Dear XXXXXXXXXX :
Re: Foreign Investments
This is in response to your letter that we received on August 13, 2008 wherein you asked several questions relating to the reporting requirements and tax implications for Canadian residents holding certain offshore investment and savings products. You made specific reference to monthly investment plans and whole of life assurance bonds.
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. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website.
Since we have not been provided with sufficient details regarding the two types of offshore investment products referred to in your letter, we are not able to provide definitive comments. However, we are prepared to provide the following general comments, which may be of assistance.
Our Comments
Your first question is whether the marketing of offshore investment and savings products to non-residents and residents of Canada is permitted. The Income Tax Act (the "Act") does not regulate the marketing of offshore investments/savings products. To find out whether any restrictions exist, we suggest you inquire with the applicable regulatory authorities.
Your second and fourth questions relate to the foreign property reporting requirements for Canadian residents. The foreign property reporting rules can be found in section 233.3 of the Act. Subsection 233.3(3) of the Act requires a "reporting entity" to file Form T1135, Foreign Income Verification Statement, by that person's normal tax return filing deadline under Part I of the Act. Subsection 233.3(1) of the Act defines a "reporting entity" to be a "specified Canadian entity" whose total cost amount of "specified foreign property" exceeds $100,000. The term "specified Canadian entity" is defined by exclusion; however, an individual who is resident in Canada will generally be a "specified Canadian entity". A "specified foreign property" is defined in subsection 233.3(1) of the Act. Paragraph 233.3(1)(d.1) of the Act, which if enacted in the form proposed by former Bill C-10 (Second Senate Reading December 4, 2007) 1 will be applicable to returns for taxation years that begin after 2006, includes in the definition of "specified foreign property", an interest in an insurance policy that is deemed by proposed subsection 94.2(11) in former Bill C-10 to be a participating interest in a non-resident entity. Whether the particular investment product referred to in your letter constitutes a life insurance policy is a question of fact and law.
The $100,000 test for the purposes of section 233.3 of the Act is applied to the "cost amount" of all "specified foreign property" of the taxpayer, computed in the aggregate. Accordingly, where the aggregate of the "cost amount" of all the "specified foreign property" held by a taxpayer exceeds $100,000, the taxpayer will be required to report each "specified foreign property" held by the taxpayer, even though no particular "specified foreign property" has a "cost amount" exceeding $100,000. Subsection 248(1) of the Act defines the phrase "cost amount" for purposes of the Act.
In terms of your third question, the foreign property reporting rules in section 233.3 of the Act will apply to the extent that conditions set out in that provision are met. This is the case regardless of whether the taxpayer acquired the offshore investments in one year or over a period of years.
Your fifth question asks whether the proceeds/maturity value can be used for income earning purposes or to repay borrowing. The Act does not dictate how the proceeds on disposition or the maturity value of a particular investment are to be used by a taxpayer. In general terms, where the funds are used to acquire another investment, the amount reinvested will be reflected in the cost of the new investment. The eventual disposition of the new investment could give rise to an income gain or loss or a capital gain or loss, depending on whether the new investment is income or capital in nature. If the funds are used to reduce an outstanding loan balance and the proceeds of the loan were used to earn income from a business or property or to acquire property to earn such income, the interest on the remaining loan balance may continue to be deductible to the extent that the requirements of paragraph 20(1)(c) of the Act are met. For more information on interest deductibility, please refer to Interpretation Bulletin IT-533, Interest Deductibility and Related Issues.
With regard to your last question, it is difficult to provide substantive comments relating to the tax implications of holding certain offshore investment products without first having an opportunity to review the terms and conditions associated with these products. In general, a person who is resident in Canada is subject to tax on all of his or her income from all sources, including sources outside of Canada. Therefore, income from investment products may be taxed as capital gains, interest or dividend income in the Canadian resident's hands depending on the nature of the particular investment product. A Canadian resident individual may claim, against Canadian tax otherwise payable, a foreign tax credit in respect of income or profits taxes paid to a foreign country. For additional information, you can refer to Interpretation Bulletins IT-270R3, Foreign Tax Credit, and IT-395R2, Foreign Tax Credit - Foreign Source Capital Gains and Losses.
Current section 94.1 of the Act applies where a taxpayer has invested in an offshore investment fund and one of the main reasons for the investment is to reduce or defer the tax liability that would have applied to the income generated from the underlying assets of the fund if such income had been earned directly by the taxpayer. In these circumstances, current section 94.1 of the Act generally requires an amount to be included in computing the taxpayer's income from the investment.
We note that the proposed foreign investment entity ("FIE") rules in sections 94.1 to 94.4 in former Bill C-10, applicable to taxation years that begin after 2006, are intended to replace the current rules in section 94.1 of the Act. The proposed FIE rules may apply to any foreign investment held by a Canadian resident individual. Where a taxpayer holds a participating interest (other than an exempt interest) in a non-resident entity that is a foreign investment entity, the FIE rules may apply to require the taxpayer to include a specified amount in computing income in respect of the investment.
If the investment product constitutes a life insurance policy, the proposed FIE rules contain specific provisions governing the tax treatment of an interest in the life insurance policy with respect to the taxation in Canada of income earned in connection with a life insurance policy. As noted above, where proposed subsection 94.2(11) in former Bill C-10 applies to deem the interest in the life insurance policy to be a participating interest in a non-resident entity, the taxation of income earned in connection with the life insurance policy would be determined with reference to the FIE rules. Where the "life insurance policy" is not deemed by proposed subsection 94.2(11) to be a participating interest in a non-resident entity, the life insurance policy will be subject to the ordinary rules for the taxation of life insurance policies under the Act. For the taxation rules applying to life insurance policies, reference should be made to sections 12.2, 56, 60, 138.1 and 148 of the Act. We note that any gain realized from the disposition of a life insurance policy, except to the extent an interest in the life insurance policy is deemed to be an interest in a related segregated fund trust, is precluded from capital gains treatment by virtue of subparagraph 39(1)(a)(iii) of the Act. As a consequence, gains realized on the disposition of a life insurance policy are generally subject to full taxation. A general explanation of the taxation of participating interests in a non-resident entity and the taxation of life insurance policies under the Act are beyond the scope of this letter.
We trust these comments are of assistance.
Yours truly,
Jenie Leigh
Manger
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 Former Bill C-10 received second reading of the Senate on December 4, 2007 but Parliament was prorogued before this bill was enacted. The proposed amendments contained in this bill have yet to be re-introduced.
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