23 November 1992 Income Tax Severed Letter 9206255 - Meaning of Other Similar Property

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.

920625
D.Patrick
24(1) (613) 957-2125

Attention: 19(1)

November 23, 1992

Dear Sirs:

Re: Paragraph 133(8)(d) of the Income Tax Act (Canada)

This is in reply to your letter of February 24, 1992 wherein you requested a technical interpretation of paragraph 133(8)(d) of the Income Tax Act.

In your letter you defined the issue as follows:

• If an NRO acquires a number of different bonds, debentures or other debt obligations (collectively "debt obligations") and holds them until maturity (as permitted by subclause 133(8)(d)(ii)(A)), will such actions ever constitute "trading or dealing" in debt obligations as prohibited by subclause (iv)(B)?

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You also but forward the following argument in your letter

" the only apparent difference between the permissive
activities through which an NRO is entitled to earn its
income, ((ii)(A)) and the principal business prohibition,
((iv)(B)) is that it is permissible for the NRO to derive
income from the "ownership" of debt obligations, but the
principal business cannot be "trading or dealing" in debt
obligations. The addition of the word "ownership in the
permissive section seems to imply that an NRO may make
numerous acquisitions of debt obligations holding such
obligations to maturity and deriving income therefrom. The
omission of the word "ownership" under the principal business
prohibition seems to imply that trading or dealing is somewhat
different than ownership. Arguably, the mere acquisition,
holding or ownership of debt obligations should not constitute
"trading or dealing". The buying and selling of debt
obligations should be required before an NRO is "trading or
dealing" in debt obligations. "

Our Comments

Your request for an opinion does not contain sufficient facts to enable us to give you a definitive response, however we wish to provide you with the following comments on the issue raised in your query.

At the outset we wish to highlight that the section in question does not use the words "debt obligations", and it will be a question of fact in each case to determine if the income is generated from

• (A) ownership of or trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property of any interest therein,...

In our view, it may well be that certain types of debt obligations (i.e. accounts receivable, inter alia), would not constitute "other similar property" within the meaning of subparagraph 133(8)(d)(ii). Also, in our view it is necessary to approach the question of the interpretation of the words in subparagraphs 133(8)(ii) and (iv) by bearing in mind the setting in which these subsections are found. The function of the NRO is to act as a conduit between its non-resident shareholders and its Canadian investment income. The intent of the NRO system of taxation is to allow a corporation which is owned by non-residents to elect a taxation system that would collect the same amount of tax as the non-resident individuals would pay if they made the same investments directly rather than through a corporation. This tax treatment is however subject to the "principal business test" in subparagraph 133(8)(d)(iv) which tends to restrict business activities and encourages investment as the main source of income for NRO's.

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The question of whether the degree of activity, the relationship between the parties creating the "investment", or the type of asset "held" by the corporation has reached the stage of being considered to be "business income" as opposed to "income from property" will necessarily be a question of fact to be determined on a case by case basis, similarly, the question of whether a business is its "principal business" subparagraph 133(8)(d)(iv) will be a question of fact. IT-290 sets out the Departments view on the factors to consider in making this determination. The Supreme Court has recently indicated that the mere fact that a corporation earns income raises the presumption that the income from that corporation is "business income". It is arguable that to have qualifying income for the purposes of paragraph 133(8)(d) the onus is on the taxpayer to show that the income was generated from the property itself, as opposed to the active business of the corporation in obtaining the income in question.

With respect to your arguments on "trading and dealing" we agree with you that the omission of the word "ownership" under the principal business prohibition implies that "trading or dealing" is somewhat different than ownership". Trading or dealing has generally been included within the understanding of the concept of "business" income. The leading case dealing with an adventure and concern in the nature of trade was M.N.R. v. Tayor [[1956] C.T.C. 189] 56 DTC 1131, where court held that the concept of "business" is a concept of wider import than that of a trade in that it embraces any gainful activity, but it does not define the term "trader". The recent case of Vancouver Art Metal Works Ltd. v. the Queen [[1991] 2 C.T.C. 315] 91 DTC 5643 looked at the question of who would be considered to be a "trader and dealer of Securities for the purpose of subsection 39(5). We agree with you that in most cases it would be necessary to buy and sell securities before one could be viewed as being involved in trading or dealing, however, such a determination would ultimately depend on the facts.

In your letter you indicated that you were unaware of any jurisprudence on this issue and in that regard I wish to draw you attention to the case of No.479 v. M.N.R. [18 Tax A.B.C. 272] 58 DTC 9. In that case a company was claiming that it qualified as an NRO investment corporation however its appeal was dismissed when it failed to convince the Board that commissions received for guaranteeing loans were income derived from "trading or dealing in mortgages, hypothecs, bills, notes or other similar property. The court held that the income in question...

• has the character of a reward for a personal service, but not a reward attached to the ownership of the assets possessed by the appellant. There is a difference between returns from invested capital and rewards for personal services.

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and on the issue of its principal business the court held that an NRO

• It had to restrict itself to the investment of money in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein, with the real intention to acquire the property in order to derive an acquire the property in order to derive an income from any form of investment, as long as the corporation did not seek to make a revenue from the making of loans or the trading or dealing in bills, notes, etc.

This jurisprudence suggests that with respect to the ownership of property the NRO's income should come from the property simply because it owns it and not form a business activity involving that property to be qualifying income for the purposes of paragraph 133(8)(d).

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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