5-901506
Dear Sir:
Re: Request for Technical Interpretation Paragraph 133(8) (d) of the Income Tax Act (the "Act")
We are writing in response to your letter, dated June 28, 1990, wherein you requested our views concerning the application of the above-noted provision of the Act to the following hypothetical situation:
1. A "non-resident owned investment corporation" ( "NRO" ), as defined in paragraph 133(8) (d) of the Act, transfers an interest in a mining claim, which is a "Canadian resource property" within the meaning assigned by paragraph 66(15) (c) of the Act, to a "taxable Canadian corporation" as defined in paragraph 89(1) (i) of the Act;
2. The amount that the NRO and the corporation agree upon in their election, pursuant to subsection 85(1) of the Act, is $1;
3. The mining claim has a "cost amount, within the meaning assigned by subsection 248(1) of the Act of nil.
You have asked whether the transfer of the asset would result in a gain on disposition or whether it would be treated as a cost recovery or royalty. You have further asked whether the gain, cost recovery or royalty would be considered to be income other than that contemplated in subparagraph 133(8)(d)(ii) of the Act ("Qualifying Income"), such that the transferor would lose its status as an NRO.
Our comments
Since the transfer is the subject of an election under section 85 of the Act, paragraph 85(1)(a) will apply to deem the agreed amount to be proceeds of disposition. The agreed amount should not, in our view, be treated as a cost recovery or as a royalty.
These proceeds of disposition of $1 will not give rise to an income inclusion unless:
(a) they exceed the costs of disposition that are not otherwise deductible under Part I (see clause 66.2(5)(b)(v)(A)); and
b) the "cumulative Canadian development expense", as defined in subparagraph 66.2(5)(b), is not sufficient to absorb the excess of the proceeds of disposition over such costs of disposition,
such that an amount is included in income by virtue of paragraph 59(3.2)(c) of the Act.
It is our view that any income included by virtue of paragraph 59(3.2)(c) would not constitute Qualifying Income and would result in the transferor losing its status as an NRO.
The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.
Yours truly,
for Director Reorganizations and Non-resident Division Rulings Directorate Legislative and Intergovernmental Affairs Branch