10 May 1996 Internal T.I. 9616520 - FEASIBILTY AND CUSTODIAL EXPENSES

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.

Question Number 13 - Foreign Feasibility and Custodial Expenses

We recommend that your draft response be amended to take into account the following comments.

1) Since tax result may vary depending on the actual facts of a particular case, we suggest that your response be prefaced with a comment to the effect of the following.

"It is difficult to provide definitive comments in connection with the question asked without the benefit of all the relevant facts. However, we provide the following general comments."

2) The comments in IT-475 are in the context of an existing business or a potential new business, carried on or to be carried on by the taxpayer (i.e. the corporation resident in Canada). They may not be on point with respect to the treatment of expenses incurred for the purpose of determining the feasibility of a potential new business to be carried on by another corporation. Therefore in order for the comments in IT-475 to have application, the facts must be such that the foreign business is to be first carried on by the corporation resident in Canada through a foreign branch, which branch is later transferred into a newly incorporated wholly-owned foreign affiliate. In such case, fair market value consideration should be received by the Canadian corporation in respect of any property (e.g. eligible capital property) that is transferred to the subsidiary.

3) The comments in IT-454 entitled "Business Transactions Prior to Incorporation" may be of assistance in reference to the treatment of business transactions carried out prior to incorporation of the corporation that is intended to carry on the business. However, since the "earnings" for the purposes of paragraph 5907(1)(a) of the Regulations and therefore the surplus accounts of a foreign affiliate, associated with an active business carried on by it, are generally computed in accordance with foreign income tax law, it is not clear how the comments in IT-454 would be applied here without full knowledge of the facts.

4) Subsequent to the incorporation of the subsidiary it would generally be expected that a fair market value fee would be charged where expenses are incurred on behalf of, or services (e.g. management services) are rendered to, the wholly-owned foreign affiliate. If that were not the case, subsection 69(3) of the Act may apply.

5) We would not have thought that paragraph 20(1)(bb) of the Act would have application to the cost of holding company activities associated with a wholly-owned subsidiary. That provision appears to have been directed toward fees paid to investment advisors for advice in reference to purchases and sales of small interests in unrelated corporations.

Prepared by: Olli Laurikainen

Date: May 10, 1996

File #: 961652