16 November 1999 External T.I. 9925845 - FOREIGN PROPERTY RULES FOR SHARES

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: Are shares of a specific corporation foreign property?

Position: Only general information was provided.

Reasons: The nature of the shares is a question of fact.

XXXXXXXXXX 992584
W. C. Harding
November 16, 1999

Dear Sirs:

Re: Status of Shares of XXXXXXXXXX

This is in reply to your letter of September 27, 1999, in which you asked if shares of the above noted corporation were considered to be foreign property for purposes of calculating the foreign property tax under Part XI of the Income Tax Act (the "Act").

Whether a share of any particular corporation is a foreign property (as defined in the Act) at any particular time is a question of fact. In consequence, it is a matter on which this directorate cannot provide any specific assistance. However, we can provide the following general comments which may be of assistance to you.

Subsection 206(1) of the Act defines "foreign property" for the purposes of Part XI of the Act. Paragraph (d) of the definition provides that any share of the capital stock of a corporation other than a Canadian corporation is a foreign property. Subsection 89(1) of the Act defines a "Canadian corporation". The definition states

"Canadian corporation" at any time means a corporation that is resident in Canada at that time and was

(a) incorporated in Canada, or

(b) resident in Canada throughout the period that began on June 18, 1971 and that ends at that time,

and, for greater certainty, a corporation formed at any particular time by the amalgamation or merger of, or by a plan of arrangement or other corporate reorganization in respect of, 2 or more corporations (otherwise than as a result of the acquisition of property of one corporation by another corporation, pursuant to the purchase of the property by the other corporation or as a result of the distribution of the property to the other corporation on the winding-up of the corporation) is a Canadian corporation because of paragraph (a) only if

(c) that reorganization took place under the laws of Canada or a province, and

(d) each of those corporations was, immediately before the particular time, a Canadian corporation."

From a review of information available from various public sources on the internet, it is our understanding that XXXXXXXXXX was an American corporation incorporated in XXXXXXXXXX several years ago and that XXXXXXXXXX is a Canadian corporation established in XXXXXXXXXX in XXXXXXXXXX. We also understand that in XXXXXXXXXX shareholders of XXXXXXXXXX exchanged their holdings on a one for one basis for shares of XXXXXXXXXX (with the old share certificates used to represent the new holdings). Even if XXXXXXXXXX is a corporation that was incorporated in Canada its shares will not be considered shares of a Canadian corporation if it is a corporation resulting from an amalgamation or merger of, or by a plan of arrangement or other corporate reorganization between two or more corporations, one of which was XXXXXXXXXX. We are not, however, in a position to confirm this.

With respect to subsection 206(1.1) of the Act, as referred to in your letter, it should be noted that it applies to exclude shares of a Canadian corporation (as defined above) from the definition of foreign property where the shares of the corporation would otherwise be foreign property in accordance with paragraph (d.1) of the definition. Basically the foreign property definition treats the shares of a Canadian corporation as foreign property if the value of the shares is derived from foreign property. Subsection 206(1.1) then excludes certain corporations if it meets one or more of the conditions detailed in the provision.

Subsection 206(1.1) of the Act will not have any application if the shares held by the RRSP are not shares of a Canadian corporation. If the shares are shares of a Canadian corporation that derive their value from foreign property, the facts to support a particular exclusion in subsection 206(1.1) of the Act are within the knowledge of the particular Canadian corporation and are subject to verification by the Canada Customs and Revenue Agency ("CCRA"). In this respect, we noted in our research that XXXXXXXXXX may have issued a prospectus in which information on taxation may have been provided. Accordingly, you may wish to contact the corporation in order to determine what opinions they have on this issue.

As noted above, we cannot provide any information specific to the possible application of these provisions to shares that were held by your RRSP in any year. Considering our above comments it would appear to us that a share of XXXXXXXXXX was likely foreign property at all times before these transactions occurred but that XXXXXXXXXX may be a Canadian corporation and its shares may derive their value from foreign property. Whether or not this is the case, however, CCRA cannot confirm whether a particular exclusion in subsection 206(1.1) of the Act applies in the absence of an audit.

We trust this information will be of assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch