13 November 1996 External T.I. 9624075 - FOREIGN INVESTMENT AND REPORTING

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:

Treatment of an "offshore" investment purchased by a non-resident individual with an "non-resident insurance company" under the Act when the individual later becomes a resident of Canada. Several questions are asked, some of a tax planning nature, treatment under section 128.1 of the Act and new foreign property reporting rules in draft sections 233.3 to 233.5.

Position:

The Department does not make recommendations in respect of tax planning initiatives. Other issues involve questions of fact, and legal form of investment is not clear. Also treaty issues may be involved - only very general comments can be provided.

Reasons:

Our comments could be misconstrued since the true legal form of the investment is not clear.

									962407
XXXXXXXXXX							Michael Cooke

November 13, 1996

Dear XXXXXXXXXX:

Re: Unit-Link Investment

This is in reply to your letter of June 1, 1996, which was subsequently transferred to our Directorate from the Vancouver TSO's International Audit Section. In your letter you outlined a situation whereby a non-resident individual acquires "units" of an offshore investment fund and later becomes a Canadian resident. You asked several questions concerning the taxation of this investment and the taxation of a potential "reinvestment" of these funds under the Income Tax Act (the Act), including the impact of the recently proposed foreign property reporting requirements.

The situation you described in your letter appears to relate to either a proposed or completed transaction involving a specific taxpayer(s) and we are unable to consider such situations in a general letter of opinion. Should you wish the views of the Department with respect to a completed transaction, you should contact the appropriate local Tax Services Office and provide them with the full particulars of your client's situation (including copies of any contracts). Alternatively, if the situation presented constitutes a proposed transaction, you may request an advance income tax ruling in accordance with the Department's requirements as set forth in Information Circular 70-6R2 dated September 28, 1990 and the related special release dated September 30, 1992. Please note that as discussed in paragraph 14(j) of IC 70-6R2 (subject to the comments in paragraph 7) the Department does not ordinarily provide rulings on questions of fact, nor does the Department make recommendations in respect of tax planning initiatives.

Further, based on the limited information you provided, it is not clear that the offshore investment fund described in your letter would constitute a life insurance policy for the purposes of the Act. We are unable to provide any general comments on the taxation of various types of products at this time since the determination of the income tax consequences would inevitably depend on the nature of the product offered, and the potential application of any income tax convention. We are prepared, however, to offer the following comments.

Section 128.1 of the Act, which is generally applicable for the 1993 and subsequent taxation years, provides rules that will apply where a taxpayer, such as an individual, immigrates to Canada and becomes a Canadian resident. Pursuant to paragraph 128.1(1)(b) of the Act, such a taxpayer will generally be deemed to have disposed of each property owned by them at that time, other than certain types of property listed in subparagraphs 128.1(1)(b)(i) to (iv) of the Act, for proceeds of disposition equal to each particular property's fair market value. Paragraph 128.1(1)(c) of the Act, then deems the taxpayer to have reacquired each property so disposed of, for a cost equal to those deemed proceeds. The above rules would generally apply to a taxpayer's interest in a life insurance policy that is not a "taxable Canadian property" as that term is defined for the purpose of section 128.1 of the Act by subsection 248(1) of the Act.

The foreign property reporting rules were introduced in draft form on March 6, 1996. Proposed subsection 233.3(3) of the Act, applicable for taxation years of a person and fiscal periods of a partnership that begin after 1995, will require a person, or a partnership, as the case may be, that owns "specified foreign property", the total cost of which exceeds $100,000 at any time in the year, to file a prescribed form (T1135) by that person's normal tax return filing deadline under Part I of the Act, and for a partnership, the time when the partnership's return under section 229 of the Act is required. For an individual, the first reporting deadline (in respect of the 1996 taxation year) will generally be April 30, 1997. A "specified foreign property" is defined in proposed subsection 233.3(1) of the Act, and could include, where applicable, a taxpayer's interest in a foreign life insurance policy.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of the IC 70-6R2 and are not binding upon the Department.

Yours truly,

F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch