16 July 1999 External T.I. 9902155 - SUBSTANTIAL CANADIAN PRESENCE

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:

Subparagraph 108(2)(v) of the Act limits a mutual fund's holdings of shares or securities of any one corporation to 10% of the fund's total holdings. Section 206 of the Act also effectively limits a funds holdings in foreign property to 20% of the funds total property. In a particular situation a mutual fund is close to exceeding these limits. However a series of steps may be undertaken which will allow the fund to do so. We were asked to confirm that the writers’ analysis of the transactions was correct and that GAAR would not be applicable in the circumstances.

Position:

The analysis of the provisions appears to be correct in general terms. However we could not advise if the transactions would be subject to GAAR

Reasons:

The steps entail the transfer of shares of a corporation held by the fund to another corporation also held by the fund with the result that the second corporation has a substantial Canadian presence as that term is used in the Act. While such a step may in fact be implemented for bona fide reasons, there is a potential that in a particular situation it may be a GAAR transaction.

XXXXXXXXXX						990215
W. C. Harding

Attention: XXXXXXXXXX

July 16, 1999

Dear Sirs:

Re: Foreign Property - Substantial Canadian Presence

This is in reply to your letter of January 26, 1999, in which you requested technical interpretations in respect of a series of hypothetical transactions that might be undertaken by a mutual fund trust that is a registered investment and a unit trust.

While the transactions described are stated to be hypothetical, they are so detailed that we cannot provide any specific comments on them at this time. Should you wish written confirmation of the tax implications inherent in an actual situation, the transactions should be provided in an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3.

The transactions described in your letter basically entail the transfer of shares of a corporation (the "first corporation") held by a trust to another corporation (the "second corporation") also held by the trust with the result that the second corporation will acquire control of the first corporation. The second corporation does not presently have a "substantial Canadian presence" as that term is used in the Income Tax Act (the "Act"). However, it is your opinion that following the transfer, the second corporation will then have a "substantial Canadian presence" because of clause 206(1.1)(d)(iii)(B) of the Act.

We generally concur with your analysis of the application of subparagraph 108(2)(v) of the Act, section 206 the Act in general and clause 206(1.l)(d)(iii)(B) of the Act in particular to such a series of transactions. However we are not prepared to confirm in the context of a technical interpretation whether the transactions would be subject to GAAR.

We trust this reply will be of assistance.

Yours truly,

P. Spice
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate