20 November 1992 External T.I. 9202705 F - NRO - 'Other Similar Property' 'Trading and Dealing'

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Request for Technical Interpretation Definition of a "Non-Resident Owned Investment Corporation"

This is in reply to your letter of January 20, 1992 in which, you asked for a technical interpretation of Paragraph 133(8)(d)(iv) of the Act, which restricts Non-Resident Owned Investment Corporations (hereinafter NRO's) from having a principal business of trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein.

Your question was "whether or not a company can qualify as an NRO if its only activity is purchasing trade accounts receivable at a discount and holding them until payment is made by the debtor (i.e. factoring).

1.     Can trade accounts receivable be "other similar property" within the meaning of S. 133(8)(d)(ii)(A)?

2.     Would the company be trading or dealing in the accounts for purposes of S. 133(8)(iv)?

You have suggested that the class of properties listed in S. 133(8)(d)(iv) is not limited to certain types of debt with specific characteristics, and you postulate that the common characteristic of all the listed properties is that they are "choses in action", which is similar to an account receivable. You further argue that the similarities between a "trade account" and a "bill" or "note" seem greater than the similarities between a "share" and the forms of indebtedness listed. Your position is that a trade account could be considered to be "other similar property" within the meaning of S. 133(8)(d)(ii)(A). You further postulate that since a NRO is allowed to derive its income from the ownership of and from trading or dealing in the listed properties, that a company which only holds trade accounts receivable could be considered as qualifying as an NRO. You note that the prohibition in S. 133(8)(d)(iv) regarding the "principal business" of the NRO relates only to trading or dealing in the listed properties and you have argued that 'factoring accounts receivable' for ones own account would not be dealing, and further that purchasing accounts with the intention of holding them until payment is received lacks the essential characteristic of trading which is reselling for a profit.

Our Comment

In our view in approaching the question of the interpretation of the words in this section it is important to bear in mind several things which are part of the setting in which the subsection is found. The function of the NRO is to act as a conduit between its non-resident shareholders and its Canadian investments. The intent of the NRO system of taxation was to allow an investment corporation, wholly owned by non- residents, to elect a taxation system that would collect the same amount of tax as the non-residents would pay if they made the same investments directly. This tax treatment was subject to the "principal business test" in S. 133(8)(d)(iv) which tends to restrict business activities and encourage investment as the chief source of income for a NRO. The determination of whether a source of income is from a principal business is a question of fact, as set out in IT-290.

In our opinion a "chose in action" is a right of action which can be enforced in a court of law, and in that respect we agree that a trade account receivable is a "chose in action". Bonds, shares, debentures, mortgages, hypothecs, bills, and notes are also choses in action, however they also constitute security for money loaned. As you point out they are all negotiable, and they are "instruments of primary payment". A Trade Account, in contrast is a receivable for goods, or services rendered, and in this respect it is our opinion that it would not qualify as "other similar property" as listed in S.133.(8)(ii).

Based on the information provided it remains a question of fact whether or not the factoring of accounts receivable is a business activity. If this is in fact a business as suggested by the reasoning of the Supreme Court of Canada in Canadian Marconi Company v. the Queen (1986) CTC and the income emanates from the business activity rather than from the ownership of property it is arguable that such income is not qualifying income for the purposes of subsection 133(8)(d).

In addition we note that in the use of factoring account receivables arrangements it is not always clear whether or not the arrangement results in a sale or loan. If in fact the corporation has made a loan it would appear that its only activity was the making loans and if that activity constituted a business it would be its principal business.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch