| 24(1) | 5-901839 |
| D.J. Lightheart | |
| (613) 957-8961 |
19(1)
November 14, 1990
Dear Sirs:
We are responding to your letter of August 3, 1990 wherein you requested guidance with regard to the restriction imposed in the Income Tax Act (the "Act") on the holding of foreign property in a pension plan registered in Canada.
Specifically you have asked us to determine whether in certain particular situations, a pension plan would be required to remit tax as determined in subsection 206(2) of the Act. It is not our practice to respond to particular fact situations except on a rulings basis, however, we will give the following general comments which we trust will be assistance to you.
Where a taxpayer is described in subsection 205(1) of the Act, subsection 206(2) of the Act levies a tax of 1% of the amount by which the cost amount of foreign property held by the taxpayer exceeds 10% of the cost amount of all property held by the taxpayer. This tax is calculated every month based on the assets held in the plan that month regardless of whether there has been a change in the plan that month.
"Cost amount" is defined in subsection 248(1) of the Act to mean, where the property is capital property, its adjusted cost base to the taxpayer at a particular time and, where the property is a debt owing to the taxpayer, the amount of the debt that was outstanding at the time. A property purchased in U.S. dollars will not have its cost amount altered if the U.S./Canadian dollar exchange rates change from one month to the next.
"Property" is defined in subsection 248(1) of the Act as property of any kind whether real or personal or corporeal or incorporeal and also includes a right of any kind whatever or a share and includes money.
"Foreign property" is defined in subsection 206(1) of the Act and includes any share of the capital stock of a corporation other than a Canadian corporation; any bond, debenture, mortgage, hypothec, note or similar obligation of, or issued by, a person not resident in Canada; tangible property situated outside Canada; and intangible property situated outside Canada. We are of the opinion that intangible property would include foreign currency and cash on deposit and that such property would be foreign property if situated outside Canada. We are also of the opinion that intangible property would include an account receivable and, if it relates to a foreign property (for example the dividend receivable on a foreign stock) the account receivable would also be considered to be a foreign property until such time as the receivable is collected and the proceeds are converted to Canadian currency.
While we hope our comments are of assistance to you, they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate
Question - Sale of work-in progress
In an arm's-length transaction, Newco purchases the business assets of Oldco consisting of:
- accounts receivable
- fixed assets and equipment
- work-in-progress
Consideration (the "Total Purchase Price") for these assets consists of:
- cash
- assumption of Oldco's accounts payable
- an agreement to pay an amount (if any) representing the profit portion of work-in-progress existing at the sale date
It is assumed that no goodwill exists in Oldco's business, and therefore no portion of the Total Purchase Price represents an eligible capital expenditure. Newco continues to operate Oldco's business.
Will the additional payment, if any, to be made by Newco with respect to the profit portion of the work-in-progress, represent a deductible expense or a capital expenditure.
Answer
It is difficult to address a situation in which all the circumstances have not been provided. However, if the agreement to pay an additional amount is payment for the work-in-progress of Oldco, the amount of which is determined at a future point in time because it can not be easily determined at the sale date, then this additional payment will be part of the cost to Newco of the work-in-progress purchased from Oldco. The payment received by Oldco will be proceeds from the sale of its work-in-process which will be subject to the provisions of Section 23 of the Act.
If, however, it is established that these payments, are consideration for the goodwill of Opco's business, then such payments would constitute eligible capital expenditures to Newco.