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.
Position: See response.
Reasons: See response.
2021 CTF Annual Tax Conference
CRA Roundtable
Question 7 – Sub-funds and the Tracking Interest Rules in Subsections 95(8) to (12)
Assume that a taxpayer owns shares of a non-resident umbrella corporation contemplated by the tracking interest rules in subsections 95(8) to (12). The umbrella corporation is a foreign affiliate, the shares are a tracking interest in respect of the umbrella corporation and the shares held by the taxpayer are shares of a tracked class. Accordingly, subsection 95(11) applies.
Please confirm that the separate corporation contemplated by subsection 95(11) is deemed to own only the properties of the sub-fund and the notional shareholders are the holders of the shares.
Is the result the same if the taxpayer owns shares tracking two sub-funds? Are there two “separate corporations”, or is there only one “separate corporation” deemed to own the properties of the two sub-funds and the notional shareholders are the holders of the two classes of shares of the umbrella corporation?
CRA Response
For purposes of this response, a number of assumptions are made to make the question more detailed.
This answer assumes that the issued and outstanding share capital of the non-resident umbrella corporation (the “Umbrella Corporation”) is formed of Class A shares, Class B shares, and Class C shares. It also assumes that, under the relevant laws of Country X, the assets and liabilities and activities of Umbrella Corporation are segregated into various “sub-funds”, being “Sub-fund A”, “Sub-fund B”, and “Sub-fund C”. The properties segregated in Sub-fund A are not the same as the properties segregated in Sub-fund B, and the same applies to Sub-fund C. The Class A shares of Umbrella Corporation derive their value and income solely from the net assets and activities of Sub-fund A. Similarly, the Class B and Class C shares respectively derive their value and income solely from the net assets and activities of Sub-fund B and Sub-fund C.
A taxpayer resident in Canada (the “Taxpayer”) owns 90% of the Class A shares of Umbrella Corporation. Although Umbrella Corporation is, for purposes of the Act, a foreign affiliate of the Taxpayer, it is not a controlled foreign affiliate of the Taxpayer.
Consistent with the base scenario in the question, the Class A shares of Umbrella Corporation are, for purposes of applying subsections 95(8) to (12) of the Act, a “tracking interest” in respect of Umbrella Corporation and, for purposes of applying subsection 95(11), are a “tracking class”. Accordingly, subsection 95(11) applies. This is similarly true with respect to the Class B shares of Umbrella Corporation for purposes of the second question.
In light of these detailed facts, the first question is whether, in respect of the Class A shares held by the Taxpayer, the separate corporation contemplated by subsection 95(11) is deemed to own only the properties of Sub-fund A and the notional shareholders of that separate corporation are the holders of the Class A shares of Umbrella Corporation.
If, in addition to the Class A shares of Umbrella Corporation, the Taxpayer also owns 10% of the Class B shares of Umbrella Corporation, the second question is whether there is still only one “separate corporation” that is deemed to own the properties of two related sub-funds and whether the notional shareholders of that one separate corporation are the holders of the Class A and Class B shares of Umbrella Corporation.
With respect to the first question, the properties and activities of Sub-fund A are the ones that can reasonably be said to determine the fair market value of the Class A shares. On that basis, “the” tracked property and activities referred to in paragraphs 95(8)(a), 95(10)(b), 95(11)(a) and “the” tracked properties and activities in subparagraph 95(11)(e)(ii) are the properties and activities of Sub-fund A (although only subparagraph 95(11)(e)(ii) refers to “properties”, this response will refer to “the tracked properties and activities”).
Therefore, the properties and activities of Sub-fund A are deemed to be the properties and activities of a non-resident corporation in which the Taxpayer is deemed to own shares for purposes of determining the amounts to be included or deducted by the taxpayer under subsection 91(1) and (4) or of applying section 233.4 taking into account the various presumptions in subsection 95(11).
The answer to the first question is that the separate corporation contemplated by subsection 95(11) is deemed to own only the properties of Sub-fund A and the notional shareholders of that separate corporation are the holders of the Class A shares of Umbrella Corporation.
With respect to the second question, where the Taxpayer also owns 10% of the Class B shares, the premise that the properties and activities of Sub-fund A are the ones that can reasonably be said to determine the fair market value of the Class A shares remains the same. On that basis, “the” tracked properties and activities referred to in paragraphs 95(8)(a), 95(10)(b), 95(11)(a) and “the” tracked properties and activities in subparagraph 95(11)(e)(ii) remain the properties and activities of Sub-fund A. Therefore, the properties and activities of Sub-fund A are still deemed to be the properties and activities of a non-resident corporation in which the Taxpayer is deemed to own shares of for purposes of determining the amounts to be included or deducted by the Taxpayer under subsection 91(1) and (4) or of applying section 233.4 taking into account the various presumptions in subsection 95(11).
In addition, the properties and activities of Sub-fund B are the ones that can reasonably be said to determine the fair market value of the Class B shares. On that basis, “the” tracked properties and activities referred to in paragraphs 95(8)(a), 95(10)(b), 95(11)(a) and “the” tracked properties and activities in subparagraph 95(11)(e)(ii) are the properties and activities of Sub-fund B. Therefore, the properties and activities of Sub-fund B are deemed to be the properties and activities of another non-resident corporation in which the Taxpayer is deemed to own shares for purposes of determining the amounts to be included or deducted by the taxpayer under subsection 91(1) and (4) or of applying section 233.4 taking into account the various presumptions in subsection 95(11).
The answer to the second question is that there are two separate notional corporations. On the one hand, the tracked properties and activities of Sub-fund A are, under paragraph 95(11)(a), deemed to be the properties and activities of a non-resident corporation and, under paragraph 95(11)(e), the notional shareholders of that separate corporation are the holders of the Class A shares of Umbrella Corporation. On the other hand, the tracked properties and activities of Sub-fund B are, under paragraph 95(11)(a), deemed to be the properties and activities of another non-resident corporation and, under paragraph 95(11)(e), the notional shareholders of this other corporation are the holders of the Class B shares of Umbrella Corporation.
Finally, although this variation is not part of the question, should a taxpayer hold two classes of shares of a foreign affiliate and both classes derive their value from the same properties and activities, such properties and activities are deemed under paragraph 95(11)(a) to be owned by a single non-resident corporation. The interest of that taxpayer in that separate corporation would be determined under paragraph 95(11)(e) taking into account both classes of shares according to subparagraph 95(11)(e)(ii).
In the interest of completeness, we note that the Department of Finance announced in a Comfort Letter to the Investment Funds Institute of Canada dated March 25, 2019 that a recommendation will be made to introduce changes that would be effective for taxation years of foreign affiliates beginning after February 26, 2018 in respect of portfolio investments described in that letter.
John Meek/Jack Chang
E2021-091187
November 25, 2021
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