7 March 1997 External T.I. 9621945 - STATUS AS A NRO

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:

Would the fact that an NRO agrees to accept shares of a related company in satisfaction of interest owing to it by that company result in the NRO being considered as trading or dealing in shares for the purposes of definition of NRO in 133(8) of the Act?

Position:

Unable to determine.

Reasons:

Question of fact and we do not have all of the facts.

		962194
XXXXXXXXXX	David R. Senécal

Attention: XXXXXXXXXX

March 7, 1997

Dear Sirs:

Re: Non-resident-owned Investment Corporation Status

This is in reply to your letter of June 17, 1996, wherein you request our opinion as to the tax status of a non-resident-owned investment corporation ("NRO") governed by section 133 of the Income Tax Act (the "Act") given the following situation:

• NRO holds a note (the "Note") from another wholly-owned Canadian subsidiary ("Opco") of NRO's parent corporation ("Parentco"). Opco computes its income on an accrual basis and has deducted interest expense in respect of the Note in computing its income.
• Opco does not have sufficient cash to pay the interest on the Note and accordingly it issues special shares to NRO in satisfaction of the interest.
• Opco's special shares have the following characteristics:

a) The shares are redeemable at the option of Opco or retractable at the option of the holder thereof at an amount equal to the amount for which they are issued.

b) The shareholder has repayment priority in the event of a wind-up, liquidation or redemption of the other shares of Opco.

c) The holder thereof is entitled to non-cumulative dividends in priority to dividends paid on any other class of shares. The dividend rate is set at a fair market value amount.

d) Opco is not permitted to pay dividends on any shares of any other class in an amount that would reduce the fair market value of the special shares below the amount for which they were issued.

e) The holder of the special shares have voting rights on any matter involving a change to the preference, rights, conditions or limitations attaching the special shares.

• NRO subscribes for special shares that have a redemption and a retraction value equal to the amount of accrued and unpaid interest payable by Opco in respect to the Note for the immediately preceding taxation years.
• NRO holds the special shares as capital property.

You request that we confirm that the issuance of shares by Opco to NRO does not cause the NRO to be considered to be trading or dealing in securities so as to cause NRO not to be a non-resident-owned investment corporation as defined in subsection 133(8) of the Act.

Comments

We have reason to believe that situation you have described is a factual rather than a hypothetical one and involves proposed or completed transactions concerning specific taxpayers. As indicated in Information Circular 70-6R3, requests for a written opinion involving proposed transactions must be presented to us in the form of an advance income tax ruling request while enquiries relating to completed transactions should be directed to the appropriate Tax Services Office of Revenue Canada, as responsibility for the review of completed transactions lies with such Office. Furthermore, we are unable to respond to your specific enquiry in a general manner as it would be a question of fact as to whether or not NRO is in the business of trading or dealing in securities and we do not have sufficient knowledge of those facts.

For instance, we would wish to address this issue in the context of the overall dealings between the parties and with the knowledge of NRO's other activities or sources of income, if any. In addition, it is not clear that the special shares will have a fair market value equal to their redemption amount at the time of issue. This would depend on the value of Opco and why it does not have the ability to pay the interest. The value of such shares will also be impacted to some extent on whether or not Opco could purchase such shares at an amount less than their redemption amount. It is also not clear to us how one determines the fair market value of a non-cumulative dividend on the special shares.

There would also have to be some clear indication that NRO accepts the special shares in full satisfaction of the interest owing to it by Opco and that such acceptance is evidenced by the fact that NRO is actually including the interest in calculating its income for tax purposes. Were this not to be the case we would look at the implications of section 78 of the Act. If NRO has no other sources of income we would wish to know how NRO obtains the funds necessary to satisfy its income tax obligations or possibly pay dividends to Parentco. Other considerations would include the implications of subsection 18(4) of the Act with respect the interest deduction being claimed by Opco.

We trust that our comments will be of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch