10 March 1998 External T.I. 9804895 - definition of excluded 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.

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:

Whether trade receivables acquired in a factoring business which are used principally for the purpose of gaining or producing income which is deemed to be active business income pursuant to subparagraph 95(2)(a)(iii) would be excluded property.

Position:

Yes.

Reasons:

Income deemed to be active business income under 95(2)(a)(ii) is active business for purpose of excluded property definition in subsection 95(1).

		                                             				980489
XXXXXXXXXX 				                                               J. Stalker

Attention: XXXXXXXXXX

March 10, 1998

Dear Sirs:

Re: Definition of Excluded Property in Subsection 95(1)
of the Income Tax Act (Canada) (the “Act”)

We are writing in response to your letter dated February 26, 1998 in respect of the definition of “excluded property” in subsection 95(1) of the Act and its interaction with paragraph 95(2)(a).

You have presented the following situation:

1. A Canadian taxable corporation (“Canco”) owns 100% of the shares of a corporation incorporated and resident in a foreign jurisdiction (“FA1”).

2. FA1 owns 100% of the shares of a second foreign incorporated and resident company (“FA2”).

3.FA1 carries on an active business in the foreign jurisdiction and all of its assets (other than the stock of FA2) are used in an “active business”, as that term is defined in subsection 95(1).

4. FA2 carries on an “in-house” factoring business. The trade receivables factored by FA2 are acquired from FA1. FA1 generates these trade receivables from its active business.

5. More than 90% of FA2’s assets are represented by the trade receivables acquired from FA1. FA2 does not require more than five full-time employees to carry on its factoring business.

6. The shares of FA2 represent more than 10% of the assets of FA1 based on cost and fair market value.

Taking into account the definitions of “active business”, “investment business”, “income from property” and ‘excluded property” in subsection 95(1) of the Act, it is our view that the trade receivables acquired by FA2 from FA1 would be excluded property as defined by subsection 95(1) of the Act, as those trade receivables are used principally for the purpose of gaining or producing income which is deemed to be active business income pursuant to subparagraph 95(2)(a)(iii) of the Act. It is a question of fact whether the shares of FA2 would qualify as excluded property; however, if the trade receivables represent 90% or more of the property of FA2, the shares would qualify as excluded property. It is similarly a question of fact whether the shares of FA1 qualify as excluded property. Such a determination would have to take into account all the property of FA1.

The above comments represent our general view with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and Interpretations Directorate

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