18 August 1998 External T.I. 9816855 - NRO AND UNPAID DEBT

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.

XXXXXXXXXX 981685
Denise Dalphy

Attention: XXXXXXXXXX

August 18, 1998

Dear Sirs:

Re: Application of Section 78 to a Non-Resident-Owned Investment Corporation (“NRO”)

This is in reply to your letter of June 22, 1998 with regard to the application of section 78 of the Income Tax Act (the “Act”) where a Canadian corporation, which is a subsidiary of a United States corporation, has not paid certain amounts that it owes to its sister NRO. In particular, you enquire whether the administrative practice described in subparagraph 15(a) of Interpretation Bulletin IT-109R2 would be applied in this situation.

Subparagraph 15(a) of IT-109R2 provides: “Generally (emphasis added),where an unpaid amount exists between a debtor and a creditor who are not dealing at arm’s length and both taxpayers account for income on the accrual basis, subsection 78(1) will not be invoked...”. Subparagraph 15(a) then goes on to provide a few examples of situations where it would clearly be improper to extend the administrative practice, for example, where Part XIII tax is deferred.

It is not appropriate to consider extending the administrative practice described in of subparagraph 15(a) of IT-109R2 to a transaction involving an NRO creditor at this time.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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