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:
Where a municipal corporation or a subsidiary of a municipal corporation invests surplus cash in shares, would any dividends received on the shares and any capital gain realized on the disposition of the shares be considered to be income from activities carried on outside the geographical boundaries of the municipality for the purposes of paragraph 149(1)(d.5) and (d.6)?
Position:
Factual determination. Based on the facts provided, it would seem reasonable to consider any dividends received and any capital gain realized on the disposition of the shares to be income from activities carried on within the geographical boundaries of the municipality.
Reasons:
Wording and intent of the legislation.
XXXXXXXXXX 1999-000695
Attention: XXXXXXXXXX
February 21, 2000
Dear Sir:
Re: Municipal Corporation - Passive Investments
This is in reply to your letter dated September 15, 1999 wherein you requested an interpretation of the provisions of paragraphs 149(1)(d.5) and (d.6) of the Income Tax Act (the "Act"). Of specific concern to you is the application of the geographical restriction in these provisions since a municipal corporation or a subsidiary of a municipal corporation (the "subsidiary") may use surplus cash balances to make passive investments from time to time. We also acknowledge receipt of your letter dated December 23, 1999.
You describe a hypothetical situation where a municipality or a subsidiary acquires shares of a taxable Canadian corporation for investment purposes and holds the shares in a passive manner. You advise that all dealings with and in relation to the shares by the municipal corporation or the subsidiary would be carried on within the geographical boundaries of the municipality. This would include the initial acquisition of the shares and physical delivery of the share certificates, the storing and safekeeping of the share certificates, the receipt of any dividends on the shares (i.e., funds are deposited in a bank account located inside the geographic boundaries of the municipality or the cheque in the amount of the dividends is delivered to offices of the municipal corporation or the subsidiary located inside the geographical boundaries of the municipality), and the ultimate sale of the shares.
Subject to subsections 149(1.2) and (1.3) of the Act, paragraph 149(1)(d.5) of the Act exempts a corporation from Part I tax on its taxable income for a particular period if not less than 90% of its capital is owned by one or more municipalities in Canada and the income of the corporation from activities carried on outside the geographical boundaries of the municipalities does not exceed 10% of its income for the period. Paragraph 149(1)(d.6) of the Act contains a similar geographical restriction.
Whether income for a particular period is from activities carried on within or outside the geographical boundaries of the municipality is a question of fact. In the situation described, we share your view that the acquiring, holding and disposing of the shares by the municipal corporation or the subsidiary constitute activities. In determining whether these activities are carried on within or outside the geographical boundaries of the municipality for the purposes of paragraphs 149(1)(d.5) and (d.6) of the Act, the facts provided would seem to suggest that the activities are carried on within the geographical boundaries of the municipality. In such circumstances, any capital gain realized on the disposition of the shares and any dividends received on the shares should not fall within the ambit of the 10% portion of the test provided for in paragraphs 149(1)(d.5) and (d.6) of the Act.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on the Agency in respect of any particular situation.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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