3 May 2002 External T.I. 2001-0100055 - FOREIGN PROPERTY OF REGISTERED PLANS

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Would the relieving provisions in subparagraph 206(2)(a)(iii) of the Act apply where a registered plan chooses to exchange shares in a Canadian corporation for shares of a foreign corporation that has acquired a substantial number of shares of the Canadian corporation?

Position: Question of Fact.

Reasons: The security acquired in the exchange must be a "qualifying security" as defined in subsection 206(3.2) of the Act.

XXXXXXXXXX 2001-010005
P. Kohnen
May 3, 2002

Dear XXXXXXXXXX:

Re: Request for technical interpretation - Foreign Property of Registered Plans

This is in reply to your facsimile of September 5, 2001 wherein you requested our views with respect to a briefly outlined scenario in which a registered plan holds shares of a Canadian corporation. After acquisition of a substantial number of the shares of the Canadian corporation by a foreign corporation, shares of the Canadian corporation may be exchanged for shares of the foreign company. You questioned whether the shares of the foreign corporation acquired in the exchange would immediately be foreign property for the registered plan.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments, which may be of assistance.

Subsection 206(2) of the Income Tax Act (the "Act") generally provides that, where at the end of any month after 2000 the total cost amount of foreign property held by a taxpayer described in any of paragraphs 205(a) to (f) of the Act exceeds 30% of the cost amount of all property held at that time by that taxpayer, the taxpayer is subject to a tax in respect of that month of 1% of the lesser of the excess and the total of the cost amounts of all foreign properties acquired after June 18, 1971.

For months ending after December 20, 1991, subparagraph 206(2)(a)(iii) of the Act provides an exception to the general rule above, in that where property has become foreign property after its acquisition by the taxpayer, its cost amount will not be included in calculating tax under subsection 206(2) for a period of 24 months after the time that the status of the property has changed. This is noted in paragraph 7 of Interpretation Bulletin IT-412R2, as referred to in your submission.

Subsection 206(3.1) of the Act extends the relief provided by subparagraph 206(2)(a)(iii) where a "qualifying security", that is foreign property, is issued to a taxpayer in exchange for another security held by the taxpayer. Where the conditions of subsection 206(3.1) are met and the exchanged share was not foreign property at the date of exchange, the relief provided by subsection 206(2)(a)(iii) will be extended in respect of the qualifying security from the date of the exchange. Where the exchanged share was foreign property at the date of the exchange, the relief will be extended from the date the exchanged share became foreign (the balance of the 24 months of relief in respect of the exchanged share will be applied to the qualifying security acquired in the exchange).

Subsection 206(3.2) of the Act defines a "qualifying security" for the purpose of subsection 206(3.1). The definition includes a security acquired in an "eligible distribution" (commonly referred to as a "spin-off distribution"), as described in subsection 86.1(2) of the Act. The scenario you describe briefly in your submission does not involve a spin-off distribution.

The definition of a qualifying security in subsection 206(3.2) also includes a corporate security issued to a taxpayer in exchange for another security held by that taxpayer in the course of: a corporate merger or reorganization of capital, a transaction or series of transactions in which control of the corporation that issued the other security is acquired by a person or group of persons, or a transaction or series of transactions in which all or substantially all of the issued and outstanding shares (other than shares held immediately before the transaction or the beginning of the series by a particular person or related group) of the corporation that issued the other security are acquired by the particular person or related group. It is a question of fact as to whether a security is exchanged for another security in the course of any of the events described in clauses 206(3.2)(a)(ii)(A) to (C) of the Act.

We trust that the above comments are of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Industries Division
Income Tax Rulings Directorate