20 June 1996 External T.I. 9612225 - FOREIGN PROPERTY, FORWARD CONTRACT

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:

Would a foreign currency forward contract be a foreign property where contract is between two Canadian residents?

Position:

Question of Fact

Reasons:

Subject to certain exceptions, generally the contract would not be intangible property situated outside of Canada

		961222
XXXXXXXXXX	M.P. Sarazin

Attention: XXXXXXXXXX

June 20, 1996

Dear Sirs:

Re: Definition of Foreign Property

This is in reply to your letter dated April 4, 1996, wherein you requested our comments as to whether certain property would be considered foreign property, within the meaning assigned by subsection 206(1) of the Income Tax Act (the "Act") and whether an initial margin would be included in the cost amount of a contract.

Foreign Currency Forward Contract

Would a foreign currency forward contract entered into by a mutual fund with a Canadian resident person or partnership constitute foreign property for purposes of the Act?

You are of the view that, because the contract is between two Canadian residents, there is sufficient case law to support a conclusion that the contract would not constitute an intangible property situated outside Canada and, as such, the contract would not be foreign property for purposes of the Act.

The determination of whether a particular foreign currency forward contract would be situated outside Canada is a question of fact. Subject to certain exceptions, we would generally agree that the contract would not be considered an intangible property situated outside Canada in a situation where both participants in a foreign currency forward contract are resident in Canada. A review of the particulars of a contract is required in order to determine whether the contract is foreign property.

Certain Put and Call Warrants

Would put and call warrants issued by a Canadian financial institution or other Canadian contra parties which are settled for cash and under which the settlement is determined by reference to a formula which is directly linked to foreign property be considered foreign property for purposes of the Act?

You are of the view that the warrants would not constitute foreign property because the holders of the warrants only have a right to monetary compensation from the Canadian resident issuer.

Where the holders and issuers of the warrants are resident in Canada, we would generally conclude that the warrants are not intangible property situated outside Canada. The fact that the settlement is determined by reference to a formula linked to foreign property would not result in the warrants becoming foreign property for purposes of subsection 206(1) of the Act. However, the provisions of paragraph 206(1)(f) of the definition of foreign property may apply with respect to a call warrant. In addition, note that there are restrictions with respect to the investments that may be held by certain registered plans. In order to avoid any taxes associated with the acquisition of non-qualified investments, you may want to ensure that the option is a qualified investment for the particular registered plan. For example, a put option is a non-qualified investment.

Initial Margin

Has there been a change to the Department's position that the "cost amount" referred to in subsection 206(2) of the Act in respect of futures contracts, forward contracts and other similar derivative instruments excludes the initial margin deposited as security for the performance of the contract?

Generally, funds deposited as an initial margin representing security for the performance of the contractual obligations under the particular contract are excluded from the cost amount of the contract.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch