Income Tax Technical News, No. 9, 10 February 1997

"If the investment income from a financial instrument involves an entity located off-reserve, that investment income will not qualify as personal property situated on a reserve."

RC will "continue to accept circumstances such as, change of control, ratings decline or asset sales as being events of failure or default under a particular loan agreement although they may not be listed defaults under the terms of the agreement. However, the Department will continue to maintain that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender and must not be contrived."

As a result of an amendment to s. 69(11), "a series of transactions that results in the transfer of the benefit of the losses, deductions or other amounts from one corporation to a corporation with which it is not affiliated will generally be considered to result in an abuse ... ."

Where two unrelated shareholders each own 50% of the shares of a corporation, the fact that they used their own RRSPs to acquire shares of the corporation is not by itself an indication that they do not deal at arm's length with the corporation immediately after the acquisition, even though the corporation will be controlled by the group consisting of the two shareholders since they generally would act in concert.

The words "wholly or partly attributable to" in subparagraph 88(1)(c.3)(i) are very broad and would apply, for example, to a share or interest in a corporation, partnership or trust which owns or has an interest in the subsidiary's property. However, shares of the parent issued as consideration for the shares of the subsidiary are expressly excluded from the rule.

The words "determinable primarily by reference to" in subparagraph 88(1)(c.3)(ii) are, we understand, intended to have a narrower meaning. As the Explanatory Notes confirm, subparagraph 88(1)(c.3)(ii) would apply to property such as "tracking" shares or debt, the value of which is somehow tied to the value of or proceeds from certain underlying property of the corporation. On the other hand, the provision would not ordinarily apply to conventional common or preferred shares or debt issued by the parent as consideration for the acquisition of the shares of the subsidiary.

Where two unrelated shareholders each own 50% of the shares of a corporation, the fact that they used their own RRSPs to acquire shares of the corporation is not by itself an indication that they do not deal at arm's length with the corporation immediately after the acquisition, even though the corporation will be controlled by the group consisting of the two shareholders since they generally would act in concert.

In the Technical News No. 5, dated July 28, 1995, we mention that in computing the adjusted cost base (ACB) of a partner's partnership interest at a particular time, only the partnership's income or loss for fiscal periods ending before that time will be taken into account. ..

… In circumstances where there is a possibility of double taxation, we are prepared, in the context of a ruling request, to apply the law in a manner such that a taxpayer is not taxed twice on the same amount. For example, if a partner dies or leaves the partnership, we may consider certain adjustments in situations where double taxation arises.

The Department of Finance agrees with our position and is currently reviewing the relevant provisions of the law to establish if legislative amendments are necessary.