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: Whether a certain unit trust resident in Canada owns a participating interest in a non-resident entity in the situation outlined in the letter?
Position: Yes
Reasons: Paragraph (d) of the definition of "participating interest" would apply.
XXXXXXXXXX 2003-000835
S. Leung
April 24, 2003
Dear XXXXXXXXXX:
Re: Foreign Investment Entity - Proposed Section 94.1 of the Income Tax Act (the "Act")
We are writing in reply to your facsimile correspondence of March 17, 2003, in which you requested our view as to whether the Agreement described below constitutes a participating interest in a non-resident entity in the following situation for the purposes of proposed section 94.1 of the Act in the draft legislation issued by the Department of Finance in October 2002 (the "Draft Legislation").
The Situation
1. A unit trust (the "Trust") resident in Canada for the purposes of the Act is created under Canadian law. The Trust is not an exempt taxpayer for the purposes of the proposed section 94.1 of the Act in the Draft Legislation.
2. The sole unitholders of the Trust are entities described in subsection 149(1) of the Act. The units of the Trust are issued to the unitholders in consideration of Canadian funds payable to the Trust.
3. The sole assets of the Trust are Canadian funds and certain rights under an agreement entered into with a Canadian bank (the "Agreement"). The Agreement provides that the Trust agrees to make a cash payment in Canadian funds to the Canadian bank in consideration for the right to exercise against the Canadian bank an option ("option right") to obtain from the Canadian bank a pre-determined percentage of the fair market value of an investment basket that both parties have agreed upon at closing.
4. Under the Agreement, the Trust has no right, directly or indirectly, immediate or future, absolute or contingent, to any asset of the basket. The only right of the Trust under the Agreement is its right to claim from the Canadian bank Canadian funds upon the exercise of its option. Such right may be exercised at any time but not later than the Agreement's expiration date.
5. The Canadian bank is not required to acquire the portfolio described in the investment basket. However, the Canadian bank may decide to acquire all or part of the basket's portfolio in order to hedge its position under the Agreement.
6. The assets forming part of the basket's notional or real portfolio (that the Canadian bank may or may not be holding) will be securities of non-resident entities (as defined under proposed subsection 94.1(1) of the Act in the Draft Legislation) and financial instruments, derivatives or other products managed by such non-resident entities the value of which is based on the fair market value of the non-resident entities.
The term "participating interest" of a particular entity or individual in a non-resident entity is defined in proposed subsection 94.1(1) of the Act in the Draft Legislation to mean, among other things, a property that confers a right to acquire, directly or indirectly, a property the fair market value of which is determined primarily by reference to the fair market value of an interest, described in any of paragraphs (a) to (c) of the proposed definition of that term, in the non-resident entity.
It appears that the option right granted to the Trust by the Canadian bank under the Agreement fits into the above proposed definition of "participating interest" in that the option right is a property that confers a right to acquire directly a property (Canadian funds) the fair market value of which is determined primarily by reference to the fair market value of an interest (securities and other financial products) in the non-resident entities. Thus, in our view, the option right so granted to the Trust under the Agreement constitutes a participating interest as that term is defined in the proposed subsection 94.1(1) of the Act in the Draft Legislation.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinion expressed in this letter is not a ruling and is consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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