16 December 1986 Income Tax Severed Letter 5-2385 - [New Foreign Property Rules]

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.

XXXX

G. Kauppinen Tel: (613) 957-3495

Attention: XXXX

December 16, 1986

Dear Sirs:

Re: New Foreign Property Rules

This is in reply to your letter dated October 22, 1986 wherein you requested our opinion on the meaning of "portfolio investments" within the context of the proposed addition to the definition of "foreign property" for the purpose of subsection 206(1) of the Income Tax Act ("Act") contained in clause 73(1) of Bill C-23 which received first reading in the House of Commons on November 7, 1986.

Specifically, you have asked our opinion as to whether the shares or warrants of X Co. acquired in the following hypothetical situation constitute foreign property under the new rules:

1. X Co. is a taxable Canadian corporation as that term is defined in paragraph 89(1)(i) of the Act;

2. X Co. intends to do a preliminary public financing pursuant to which it will issue units comprised of non-voting shares and share purchase warrants;

3. The business of X Co. will consist of investing in risk arbitrage transactions in Canada, the United States and various other jurisprudences. Specifically, X Co. will invest only in companies which are the subject of announced corporate reorganization such as mergers, tender offers and leveraged buy-outs, the intention being to sell these investments (usually when the intended transaction is consummated) in order to achieve a combination of cash yields and trading gains.

4. X Co. will not hold securities in connection with any one transaction in excess of 25% of the total capital of X Co. (including borrowing).

5. It is anticipated that at any given point in time, the companies in which X Co. holds shares may, to a large extent, be made up of corporations other than Canadian corporations. The relative percentage of shares held by X Co. in such non-Canadian corporations could be as high as 95% of its total inventory of shares.

It is your opinion that notwithstanding the fact that the shares and warrants of X Co. may derive their value primarily from shares that constitute foreign property (the "Foreign Property Shares"), it is not clear whether the Foreign Property Shares are "portfolio investments" to X Co. since that term is not defined in the Act.

In our opinion, the determination of what constitutes a "portfolio investment" for the purpose of the proposed change to subsection 206(1) of the Act will be a question of fact in each instance.

In case law, there are two senses in which the word "investing" can be used, (1) purchasing articles or property for the income that can be obtained from them, and (2) purchasing articles or property with a view to their resale at a profit. [First Torland Investments Ltd. et al v. MNR, [1969] CTC 134 (Exch.)]

Black's Law Dictionary, 5th Edition, defines the terms "investment" and "portfolio" as follows:

Investment. An expenditure to acquire property or other assets in order to produce revenue; the asset so acquired. The placing of capital or laying out of money in a way intended to secure income or profit from its employment. Securities & Exchange Commission v. Wickham, D.C. Minn., 12 F. Supp. 245, 247. To purchase securities of a more or less permanent nature, or to place money or property in business ventures or real estate, or otherwise lay it out, so that it may produce a revenue or income.

Portfolio. In investment, the collective term for all the securities held by one person or institution.

In our view, a company could be in the business of investing even if the securities held in its portfolio constitute inventory to it rather than capital assets. The fact that all income from such securities as well as proceeds from their disposition would be entirely on income account will not in and by itself cause that company not to be in the "business of investing".

In your hypothetical example, the only activity and purpose of the company will be the investing of money in assets with a view to their resale at a profit. In our opinion, given your assumptions, this company would be holding foreign properties which constitute "portfolio investments" for the purpose of the proposed amendment to subsection 206(1) of the Act.

This opinion is our best interpretation of the proposed legislation as it will apply generally if enacted into law as currently worded. It may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, it is not binding on this Department.

Yours truly

for Director Financial Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

GX/ad