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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Ownership of shares of a non-Canadian corporation and the meaning of "eligible corporation" in Regulation 5100(1).
Position TAKEN:
If the shares of the non-Canadian corporation represent more than 10% of the property of the corporation then it will not satisfy the requirements of the definition in Regulation 5100(1).
Reasons FOR POSITION TAKEN:
To satisfy the requirements of subparagraph 5100(1)(a)(ii) the shares held must be shares of an eligible corporation. To be an eligible corporation you have to be a taxable Canadian corporation.
942012
XXXXXXXXXX A. Seidel
Attention: XXXXXXXXXX
November 1, 1994
Dear Sirs:
This is in reply to your letter dated June 3, 1994, addressed to the Client Service Division of the Vancouver District Office, with respect to the meaning of the expression "eligible corporation" as defined in subsection 5100(1) of the Income Tax Regulations (the "Regulations").
Subsection 5100(1) of the Regulations defines "eligible corporation" to mean
"(a)a particular corporation that is a taxable Canadian corporation all or substantially all of the property of which is at that time
(i) used in a qualifying active business carried on by the particular corporation or by a corporation controlled by it,
(ii) shares of the capital stock of one or more eligible corporations that are related to the particular corporation, or debt obligations issued by those eligible corporations, or
(iii) any combination of the properties described in subparagraph (i) and (ii),..."
but specifically excludes securities dealers, financial institutions, corporations whose principal business is the lending of money or the purchasing of debt and a non-resident controlled corporation.
"Qualifying active business" is also defined in subsection 5100(1) of the Regulations and means "any business carried on primarily in Canada by a corporation..." but does not include a business (other than the business of leasing property other than real property) the principal purpose of which is to derive income from property (including interest, dividends, rent and royalties) or a business of deriving gains from the disposition of property (other than property in the inventory of the business).
Whether or not a corporation is an eligible corporation within the meaning of subsection 5100(1) of the Regulations is a question of fact which can only be determined after a review of all of the relevant information.
In determining whether "all or substantially all" of the property of a corporation is used for an eligible purpose, it is generally our view that this criterion will be satisfied where 90% or more in terms of the total cost of the corporation's assets is used for an eligible purpose. However, a determination made on some other reasonable basis that is more appropriate than cost in a particular situation may also be acceptable. This is consistent with the method described in paragraph 5 of Interpretation Bulletin IT-486R (which was cancelled by IT Directive ITD-3 dated September 26, 1994). The comments in IT-486R applied to intergenerational transfers of shares of small business corporations prior to the 1988 amendments which required the determination of whether a corporation qualified as a small business corporation to be based on the fair market value of its assets.
In the situation where a corporation ("Opco") owns shares of a non-Canadian corporation ("Subco") and those shares represent more than 10% in terms of the cost of all of the property of Opco, it is our view that Opco would not be an eligible corporation. Since Subco is not a taxable Canadian corporation it would not be an eligible corporation as defined in subsection 5100(1) of the Regulations. Consequently, all or substantially all of the property of Opco would not be used for one of the purposes described in subparagraphs (a)(i), (ii) or (iii) of the definition "eligible corporation" in subsection 5100(1) of the Regulations.
These comments are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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