Principal Issues: Are derivatives such as forward contracts, futures, swaps and options considered to be "investments" for purposes of subparagraph 149(1)(o.2)(iii) of the Income Tax Act?
Position: Question of fact.
Reasons: Provided the particular derivative is a permissible investment under the PBSA, 1985 or a similar law of a province, then yes.
XXXXXXXXXX 2005-016291 G. Allen August 14, 2006
Dear XXXXXXXXXX:
Re: Subparagraph 149(1)(o.2)(iii) of the Income Tax Act (the "Act")
This letter is in response to your letter dated December 8, 2005, wherein you request a technical interpretation concerning whether derivatives would be considered to be "investments" for purposes of subparagraph 149(1)(o.2)(iii) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the CRA. All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/tax/technical/incometax/menu-e.html.
Our Comments
Subparagraph 149(1)(o.2)(iii) of the Act exempts certain corporations, referred to as pension corporations, from Part I tax where the corporation only invests in investments permitted under the Pension Benefits Standards Act, 1985 (the "PBSA") and the corporation satisfies the conditions listed in clauses 149(1)(o.2)(iii)(A), (B) and (C) concerning the investments the corporation holds. The corporation must also at all times since the later of November 16, 1978 and the date on which it was incorporated, satisfy one of the tests described in either subparagraph 149(1)(o.2)(iv) or (v). Subparagraph 149(1)(o.2)(iii) provides that a pension corporation includes; a corporation
"(iii) that made no investments other than investments that a pension fund or plan was permitted to make under the Pension Benefits Standards Act, 1985 or a similar law of a province, and
(A) the assets of which were at least 98% cash and investments,
(B) that had not issued debt obligations or accepted deposits, and
(C) that had derived at least 98% of its income for the period that is ataxation year of the corporation from, or from the disposition of, investments ..."
Accordingly, provided a particular derivative is permitted as an investment for a pension fund or plan under the PBSA or a similar law of a province, in our view, the derivative would be considered an investment for purposes of subparagraph 149(1)(o.2)(iii) of the Act.
We trust our comments will be of assistance to you.
Yours truly,
Wayne Harding
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch