23 November 1999 External T.I. 9922325 - SUBSECTIONS 17(2) AND 17(3)17(2)

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.

Principal Issues: Whether subsection 17(14) applies on the sale of the shares of a foreign financing subsidiary by a Canadian company to the latter company's foreign parent.

Position: No, provided that the sale takes place before the coming into force of subsections 17(2) and 17(3) and provided that the shares are sold at fair market value for cash consideration.

Reasons: It appears that the intention of the Department of Finance is to allow certain reorganizations before the coming into force of subsections 17(2) and 17(3).

XXXXXXXXXX 992232
S. Leung
Attention: XXXXXXXXXX

November 23, 1999

Dear Sirs:

Re: Section 17 of the Income Tax Act (the "Act")

We are writing in reply to your facsimile of August 11, 1999 in which you requested our confirmation that subsection 17(2) of the Act would not apply to the following situation.

Situation

1. Canco, a corporation incorporated in Canada, is a subsidiary of Parentco which is a foreign corporation.

2. Finco, a foreign affiliate of Canco, has made a loan to Opco which is a foreign corporation related to Finco. None of the shares of Opco is owned by Canco. The loan is still outstanding.

3. Prior to the beginning of the first taxation year of Canco in which subsection 17(2) of the Act applies, Canco will sell all the shares of Finco that it owns to Parentco.

4. After the sale of the shares of Finco by Canco, Canco will not own any shares of Finco.

Our Comments

The situation described in your facsimile appears to involve seriously contemplated transactions and identifiable taxpayers. Consequently, we would like to bring your attention to paragraph 22 of Information Circular 70-6R3, dated December 30, 1996, issued by Revenue Canada, Taxation wherein it is stated that when a requested interpretation relates to a specific proposed transaction, a taxpayer should request an advance income tax ruling rather than an opinion. The procedures for requesting an advance income tax ruling are set out in paragraph 16 of the said circular. We are, however, able to provide you with the following general comments.

In the situation outlined above, it is important to know what is the consideration paid by Parentco to Canco for the shares of Finco. For example, if the consideration is an amount payable by Parentco to Canco, subsections 15(2) and 17(1) of the Act may apply depending on the circumstances.

Assuming that the shares of Finco are sold at fair market value by Canco to Parentco for cash, subsection 17(2) of the Act would not apply to the debt owing by Opco to Finco as a consequence of the transaction described in 3 above where such transaction occurs prior to the beginning of the first taxation year of Canco in which subsections17(2) and 17(3) of the Act will apply.

The above comments represent our general views with respect to the subject matter of your facsimile. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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