23 November 1999 External T.I. 9925795 - SUBSECTIONS 17(2) AND 17(3)17(2)

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 subsection 17(14) applies to certain restructuring which will occur before the coming into force of subsections 17(2) and 17(3).

Position: In the situation described in the letter, provided that the restructuring occurs before the coming into force of subsection 17(2) and 17(3), subsection 17(14) will not be applied.

Reasons: Based on the intention of the Department of Finance to allow reorganizations before the coming into force of subsections 17(2) and 17(3) as noted in the Revised Explanatory Notes of March, 1999

XXXXXXXXXX 992579
S. Leung
Attention: XXXXXXXXXX

November 23, 1999

Dear Sirs:

Re: Subsections 17(2) and 17(14) of the Income Tax Act (the "Act")

We are writing in reply to you facsimile of September 27, 1999 in which you requested our view as to whether subsection 17(14) of the Act would apply to deem the shares in the following situation not to have been acquired or disposed of when certain corporate restructuring is implemented before the taxation year of the taxpayer that begins after 1999.

The situation is as follows:

1. Foreignco owns 100% of Canco 1 which owns more than 10% but less than 50% of all of the issued and outstanding common shares of Foreign Financeco. The remaining issued and outstanding common shares of Foreign Financeco are owned by Foreignco. The common shares of Foreign Financeco is the only class of issued and outstanding shares in the share capital of Foreign Financeco. The result of the above structure is that Canco has a qualifying interest in respect of Foreign Financeco within the meaning of paragraph 95(2)(m) of the Act and Foreign Financeco is not a "controlled foreign affiliate" of Canco 1 as that term is defined under subsection 17(15) of the Act.

2. Foreignco, Canco 1 and Foreign Financeco all have taxation years which end on December 31.

3. Foreign Financeco owns 100% of Foreign Subco which carries on an active business in a foreign country.

4. Foreign Financeco has loaned money to Foreign Subco with interest and the loan is still outstanding. If subsection 17(2) of the Act were in force now, subsection 17(1) of the Act would apply. The interest income from such loan is deemed to be active business income to Foreign Financeco pursuant to subparagraph 95(2)(a)(ii) of the Act.

5. Foreignco will incorporate Canco 2 in Canada and before January 1, 2000, Foreignco will transfer to Canco 2 a number of the common shares of Foreign Financeco sufficient to ensure that the total number of the common shares of Foreign Financeco owned by Canco 1 and Canco 2 will comprise more than 50% of all the outstanding common shares of Foreign Financeco.

Our Comments

The situation described in your facsimile appears to involve seriously contemplated transactions and identifiable taxpayers. Consequently, we would like to bring your attention to paragraph 22 of Information Circular 70-6R3, dated December 30, 1996, wherein it is stated that when a requested interpretation relates to a specific proposed transaction, a taxpayer should request an advance income tax ruling rather than an opinion. The procedures for requesting an advance income tax ruling are set out in paragraph 16 of the said circular. We are, however, able to provide you with the following general comments.

Taking into account the content of the Revised Explanatory Notes Relating to Income Tax released by the Department of Finance in March 1999, in the situation described above, we are of the view that subsection 17(14) of the Act would not apply to the transactions described in 5 above provided that the transactions are carried out prior to January 1, 2000.

You also enquired whether Foreign Financeco and Foreign Subco will become a controlled foreign affiliate of Canco 1 and Canco 2 after the acquisition of shares of Foreign Financeco by Canco 2 as described in 5 above such that the exception provided for in paragraph 17(3)(a) of the Act would apply to render subsection 17(2) of the Act not applicable. We assume that you are concerned that Foreign Financeco will not be controlled by Canco 1 and Canco 2 for the purposes of paragraph (b) or (e) of the definition of "controlled foreign affiliate" within the meaning of subsection 17(15) of the Act if the ultimate control of Foreign Financeco is in the hands of Foreignco, the parent corporation of Canco 1 and Canco 2. In our comments on the case of Parthenon Investments Limited v. M.N.R. in Technical News No. 16, dated March 8, 1999, we stated that we will not apply Parthenon's ultimate control reasoning in interpreting paragraphs 55(3.1)(a) and 88(1)(d) of the Act. Similarly, we are of the view that Foreign Financeco will be a controlled foreign affiliate of Canco 1 and Canco 2 within the meaning of subsection 17(15) of the Act.

With respect to your question of what transactions are contemplated in the Revised Explanatory Notes relating to subsection 17(2) of the Act, we recommend that you contact the Department of Finance. Our understanding is that repayment of the loan during the grand-fathering period is one alternative.

As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

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

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