Section 206

A foreign currency forward contract entered into by a mutual fund with a Canadian resident person would not constitute intangible property situate outside Canada, given that both parties were resident in Canada. Similarly, put and call warrants issued by a Canadian financial institution or other Canadian contra party which would be settled for cash, and under which the settlement was determined by reference to a formula which was directly linked to foreign property, would not constitute intangible property situate outside Canada, although the provisions of paragraph (f) might apply with respect to a call warrant.

Except in unusual circumstances, RC would consider a warrant to be an intangible property but not a share or debt instrument. However, further information would be required in a situation where the warrants of a Canadian issuer were secured by unconditional guarantees of a U.K. parent or hedged by matching warrants issued by a U.K. parent or foreign affiliates.

S.(c) does not apply to any share of the capital stock of a corporation or any bond, debenture, mortgage, hypothec, note or similar obligation. Ss.(d) to (g) cover the situations where shares or bonds can be foreign property. Accordingly, the fact that a foreign custodian acting as an agent for a trust governed by a registered pension plan holds share certificates or evidences of indebtedness outside Canada issued by a Canadian corporation is not by itself relevant for the purposes of s.(c).

Commodity futures contracts on foreign commodities exchanges will be foreign property having a cost amount equal to the sum of the brokerage fees and other costs associated with or incidental to entering into the contracts. The amount of margin required as a deposit may also be foreign property depending on the precise nature of the deposit arrangement.

Although RC recognizes that registered plan receiving foreign currency can avoid the application of Part XI tax if they transfer the funds to Canada before the end of the month, an across-the-board administrative position to ignore the holding of foreign currency outside Canada would not in its view be proper.

In discussing whether an exchangeable share was foreign property, the Agency stated:

"Where it is determined that the shares of the Canadian corporation do not derive their value, directly or indirectly, primarily from foreign property, the exchangeable shares which are excluded by virtue of subparagraph 206(1)(f)(i) of the definition of 'foreign property' will not constitute foreign property even though the exchangeable share rights entitle the holder to certain voting rights in the foreign corporation, dividends which are based on dividends and market price changes of the foreign corporation's shares and no general voting rights in respect of the Canadian corporation."

A debenture of a Canadian corporation may be foreign property where the proceeds of the debenture are used to make real estate loans to a U.S. corporation, given that the loans to the U.S. corporation may constitute "portfolio investments".

"... the Department has decided that 'portfolio investments' as used in subsection 206(1) of the Act takes on its common dictionary meaning of 'all the securities held by an investor'. The interpretation is, perhaps, coloured by the use of this term in paragraph 94.1(1)(b) of the Act where certain properties listed as portfolio investments could be considered properties used in an active business ... . In any event, the Department has resisted restricting the term as is done in the CICA Handbook so as to include only passive investments ... although in document 900245 we state that loans made by a Canadian corporation in the course of carrying on the business of lending money would not be considered a portfolio investment ... ."

"It is the Department's view that 'portfolio investments' in the context of paragraph 206(1)(d.1) of the Act means all the securities held by a taxpayer and is accordingly not confined to the investments defined as portfolio investments in section 3050 of the Canadian Institute of Chartered Accountants Handbook".

"We have taken the general position that a guarantee given by a non-resident person in respect of a note, bond, or other similar obligation issued by a Canadian resident corporation would not be 'foreign property' under paragraph 206(1)(g) of the Act. However, based on your example we are unable to comment upon whether paragraph 206(1)(d.1) of the Act applies to the obligation or to the guarantee."

A call option listed on a U.S. exchange to acquire shares of a Canadian corporation listed on a prescribed stock exchange in Canada would not be foreign property.

Ruling that the issuance of notes by the Canadian branch of a foreign bank whose principal amount was linked to the return generated on "notional investments" by the holder in foreign investment funds, in which the bank had invested, would not constitute foreign property and that s. 245(2) would not be applied to such transactions.

Ruling that an unsubordinated unsecured interest-bearing loan made to a unit trust would not be foreign property.

Mutual funds enter into cash-settled forward contracts with a counterparty under which they initially pay to the counterparty an amount equal to the value at that time of specified units of other mutual fund trusts (the "Underlying Funds") whose units are foreign property. In order to hedge itself, the counterparty enters into an agreement with the Underlying Funds. "When it is considered appropriate, the obligations of the counterparty under the Forward Contract will be guaranteed by another person who may or may not be resident in Canada ... ." The Agency ruled that the forward contracts will not be considered to be foreign property because they will be settled in Canadian dollars, and do not give a right to receive units of the Underlying Funds, would not otherwise be considered to be foreign property based on the situs of the contracts and do not involve indebtedness of a non-resident person.

A newly -established mutual fund invests in Canadian money market securities and enters into Canadian-dollar cash settled forward contracts with banks based on the net asset value at the time of settlement of a unit of existing mutual fund trusts that are invested in foreign property. RC rules that the forward contracts will not be foreign property and that their cost amount will not include the settlement price.

Mutual fund units would not be considered to be foreign property given that more than 80% of the fund's property (in terms of cost amount) was invested in interest-bearing promissory notes of a "subsidiary" unit trust ("CT") with a 25-year term, with the balance of its assets as units of CT.

Favourable ruling that where a trust that will be investing in debt instruments and engaging in swap transactions issues notes that are secured by its assets, those notes will not be foreign property.

Government of Canada bonds posted as initial or variation margin for futures contracts purchased on a foreign exchange will not constitute foreign property.

Foreign currency deposits with a Canadian bank or similar institution will not be foreign property. However, the foreign currency itself will be foreign property when acquired, even if on a temporary basis.

The writing of a covered call option is not subject to the rules governing foreign property as it does not involve the acquisition of a property or a right by the RRSP".

Canadian government bonds denominated in a foreign currency are not foreign property. Foreign currency itself would not be foreign property if it is situate in Canada.

The writing of a call or put option has no effect on the foreign property rules in s. 206. The writing of the option does not result in the acquisition of property by the plan.

A time share in a U.S. property would be foreign property. Accordingly, the tax under s. 206(2) would apply unless the property also was a non-qualified investment.

A futures contract on a foreign asset acquired by a deferred income plan is foreign property, and the cost amount of the futures contract will be the brokerage fees plus other costs incidental to the acquisition of the contract, excluding the initial margin deposited with the broker.

Favourable foreign property ruling where a mutual fund trust holds units of another mutual fund trust not representing more than 20% of the cost amount of all the property of the first mutual fund trust and the first mutual fund trust also uses derivative investments to mimic the return of the reference fund.

Favourable ruling respecting the establishment of mutual fund trusts that invest in forward contracts of financial institutions where the contracts mimic the return on underlying mutual funds holding foreign property.

A segregated fund is not a trust for purposes of Part XI. Accordingly, an interest therein would not be foreign property.

A segregated fund policy is foreign property because it is deemed by s. 138.1(1) to be an inter vivos trust.

A limited partnership ("LPII") with four limited partners that are special-purpose Canadian subsidiaries of other Canadian corporations and a general partner with a nominal partnership interest has, as its sole asset, a limited partnership interest of a second limited partnership ("LPI") that is carrying on a Canadian business and all of whose assets are Canadian. It is ruled that bonds issued by LPI will not be foreign property provided that each corporate partner's proportionate share of employment expenses for purposes of clause 206(1.1)(d)(iii)(C) exceeds the $250,000 threshold. "Given the fact that the assets of [LPI] are 100% Canadian and the terms of the limited partnership arrangement, i.e., the corporate general partner [of LPII] has no substantive economic interest in the partnership, .01%, the corporate general partner's nominal interest need not be considered when determining whether this test is met."

Employees of a limited partnership will be considered to be employees of the majority interest partner for purposes of s. 206(1.1)(d)(iii)(A).

Ruling based on s. 206 (1.1)(d)(iii)(B) that a mutual fund trust was able to hold U.S. investments outside its foreign property basket by transferring Canadian operating companies to Canadian holdcos, and having the Canadian holdcos make the U.S. investments.

"With respect to services relating to the corporation's overhead which cannot be specifically traced to its own or a non-arm's length corporation's identified investment activity, the expenses for those services may be included in the total use to satisfy the $250,000 minimum expenditure test. Overhead refers to costs such as legal, audit and directors' fees relating to the corporation's general corporate activities."

Because an amalgamated corporation is not "incorporated" by virtue of an amalgamation under the Canada Business Corporations Act or the Business Corporations Act (Ontario), it will be unable to benefit from the relief provided by s. 206(1.1)(d)(iii)(E). However, because it is a continuation of its predecessors, it will comply with s. 206(1.1)(d)(i)(A), if each predecessor was required under either such statute (or similar provincial statutes) to maintain an office in Canada.

If shares are acquired on the date of incorporation and the $250,000 test in s. 206(1.1)(d)(iii)(E) is satisfied later in that calendar year, the shares will be considered to not be foreign property from the date of acquisition. If by December 31 the $250,000 threshold has not been exceeded, the shares will be considered to be foreign property from their date of acquisition.

"The term 'services ' ... includes services performed under contract to or for the relevant corporation by an independent underwriting firm in the context of an offering of shares, warrants and/or debt of the relevant corporation to the public; the amount incurred for such services may include the commissions paid by the relevant corporation to the underwriters for their services rendered ... ."

Where the service provided by a law firm requires it to incur disbursements that are incidental to the services rendered, billings for such disbursements may be included in the computation of amount paid for such services.

"Where the corporation in question (the 'relevant corporation') enters into a contract with another corporation or partnership, the expenses paid by the relevant corporation relating to the services rendered to the relevant corporation by employees of the other corporation or the partnership, or to services rendered to the relevant corporation by the partners will be considered to be expenses incurred by the relevant corporation for the services of the other individuals ... . [T]he services provided by 'other individuals' need not be of the kind which are normally provided by employees."

A corporation that has no employees in Canada and no office in Canada other than a registered office (i.e., the office of its Canadian lawyers) that it is required to have in Canada under its articles of incorporation, will qualify as having an "office" in Canada.

"The services provided by 'other individuals' need not be of the kind which are normally provided by employees."

The establishment by a pension corporation of a subsidiary pension corporation for the purpose of increasing the percentage of underlying foreign property that could be held on a consolidate basis would not offend the provisions of section 206 (or 259).

The cost amount to a pension fund of a foreign currency swap agreement entered into under ISDA standard terms would be the aggregate of any brokerage or similar fees incidental to entering into the swap agreement, and the cost amount would not include the value of the collateral that is posted from time to time.

Units and shares are considered to be acquired on the date they are delivered, which typically is the settlement date.

As it is the position of the Agency that a share traded on a stock exchange will usually be considered to have been disposed of and acquired on the settlement date, excess foreign content will be calculated pursuant to s. 206(2) on the date the shares are delivered rather than on the record date.

Because the delisting or suspension of trading of a share does not cause the taxpayer to cease to own its share, or cause a disposition of its share, such event will not result in a reduction in the cost amount of its share.

There is no provision allowing for the write-off of a mortgage held by an RRSP.

The cost amount of units of a mutual fund trust that is foreign property include the amount of dividend distributions that have been reinvested in additional units.

The cost amount for purposes of s. 206(2) of investments in exchange-traded futures contracts and forward currency contracts will be equal to the brokerage fees and other costs incidental to entering into the contract, and will not include an amount in respect to the contract price or amounts paid as initial or variation margin.

The only exception to the rule that transfers of property between registered plans occur at fair market value applies where property in an annuitant's RRSP is transferred to another RRSP of the same annuitant. In these circumstances, the adjusted cost base of the transferred property is maintained.

Example of the interrelationship of the qualified property and foreign property rules.

There is no provision in the Act to deem a disposition of an investment and a repurchase at the time it becomes a foreign property; therefore, its cost amount generally will be its original acquisition cost.

A corporation that is an agent of a Province establishes wholly-owned corporations ("Investco's") that will qualify as s. 149(1)(o.2) corporations and which invest primarily in U.S. property (so that the Investcos rather than the pension plans which have placed funds with the Corporation for investment will be subject to U.S. tax filing obligations). Each Investco will be entitled to make the election under s. 259(3), and pursuant to s. 206(2.1) each Investco will be exempt from the application of s. 206(2).