29 July 1997 External T.I. 9638945 - INTERACTION OF SUBSECTIONS 18(4) AND 216(1)

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:

Where a non-resident corporation elects under ss. 216(1) and is subject to the provisions of ss. 18(4) does the corporation take into account all of its debts to specified non-resident's as well as all of its retained earnings, contributed surplus and paid-up capital or just that portion of such items which relate to the rental property in Canada.

Position:

The entire amount

Reasons:

The provision applies mainly to corporations resident in Canada and wording reflects this reality. There is clearly no provision which would allow the non-resident to take into account only that portion of the above items which relates to the Canadian rental property.

963894
XXXXXXXXXX David R. Senécal

Attention: XXXXXXXXXX

July 23, 1997

Dear Sirs:

Re: Application of Subsections 18(4) & 216(1) of the Income Tax Act (the "Act")

This is in reply to your letter of November 22, 1996, wherein you request our views concerning the application of subsection 18(4) of the Act as it applies to a non-resident corporation that, pursuant to subsection 216(1) of the Act, elects to file a return of income under Part I of the Act.

You have indicated that you are aware of our position that the provisions of subsection 18(4) of the Act apply to a non-resident corporation that makes an election under subsection 216(1) of the Act. However, you enquire whether, in such circumstances, the calculation of the non-resident "corporation's outstanding debts to specified non-resident's" for the purposes of subparagraph 18(4)(a)(i) of the Act as well as the calculation of the "retained earnings of the corporation", the "corporation's contributed surplus" and the "corporation's paid-up capital" for the purposes of clauses 18(4)(a)(ii)(A), (B) & (C) respectively, are to be made from the perspective of the corporation as a whole notwithstanding that a portion of this debt and/or equity may not relate to the property giving rise to the income which is the subject of the subsection 216(1) election.

In our view, it is clear from the wording in subsection 18(4) of the Act that the non-resident corporation must take into account all of its outstanding debts to specified non-residents as well as the entire amount of its retained earnings, contributed surplus and paid-up capital even though the interest expense otherwise deductible by the non-resident corporation under Part I of the Act would be limited to that which may reasonably be regarded as being applicable to the rental income in Canada.

We trust that our comments will be of assistance to you.

Yours truly,

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