| January 4, 1990 | |
| Current Amendments and Regulations | Specialty Rulings |
| Division | Directorate |
| D.Y. Dalphy | |
| Mr. B.J. Bryson | 957-2117 |
| Acting Director | |
| File No. 3-2759 |
Subject: Portfolio Investments Section 94.1 of the Income Tax Act (the "Act")
We are writing to request your assistance on a priority basis in obtaining the views of the Department of Finance on the above-referenced subject.
We are presently considering an urgent request for an advance income tax ruling, where we are being asked to rule, inter alia, that section 94.1 of the Act will not be applied to shareholders on the basis that the shares will not be regarded as deriving their value primarily from "portfolio investments".
24(1)
The taxpayer's representative argues that "portfolio investments" connotes a passive activity, does not encompass a business and is limited to properties that inherently produce income. The argument is not new - several similar requests were considered by this Department in the mid-1980's when taxpayers argued that, in similar circumstances, section 94.1 should not apply on the basis that arbitrage is a bona fide active business and the section was only intended to apply where the offshore company has passive investments in low risk and high return assets.
24(1)
Accordingly, we request your assistance in obtaining the comments of the Department of Finance as to their intention in selecting the term "portfolio investments" (or terms "portfolio" and "investment") and whether the term was meant to be inapplicable where the entity carries on business (in which case, section 94.1 will be a section that could apply to only a few unusual situations) or whether it was intended to choose a broad word, used commercially, that would exclude controlled foreign affiliates or true equity investments relating to the investor's business.
Thank you in advance for your assistance.
M.A. HiltzDirector GeneralSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch