21 July 1998 External T.I. 9808535 - EXCLUDED PROPERTY - FOREIGN AFFILIATES

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 property use by a foreign affiliate to earn rental income that is deemed by subparagraph 95(2)(a)(ii) to be income from an active business would be "excluded property".

Position: Yes

Reasons: The property would be use or held to earn income from an active business. Income that is treated as income from an active business under 95(2)(a)(ii) is also active business income for purposes of the excluded property definition in subsection 95(1)

XXXXXXXXXX 	Tim Kuss
		980853

Attention:  XXXXXXXXXX 

July 21, 1998

Dear Sirs:

Re: Subsection 95(1) - Definition of "Excluded Property"

We are writing in response to your letter dated April 1, 1998 in respect of the definition of "excluded property" in subsection 95(1) of the Income Tax Act (the "Act") and its interaction with subparagraph 95(2)(a)(ii).

You have presented the following situation:

1. A taxable Canadian 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 owns land and a building (the "Rental Properties") that it leases to FA1 and which FA1 uses to carry on its active business. FA2 charges FA1 a fair market rent for the use of the Rental Properties.

5. More than 90% of FA2’s assets are represented by the Rental Properties. FA2 does not require more than five full-time employees to carry on its leasing 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), it is our view that the Rental Properties would be excluded property as defined by subsection 95(1), as those assets are used or held principally for the purpose of gaining or producing income which is included in computing income of FA2 from an active business pursuant to subparagraph 95(2)(a)(ii). It is a question of fact whether the shares of FA2 would qualify as excluded property; however, if the Rental Properties 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 International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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