| 19(1) | File No. 5-8946 |
| R.C. O'Byrne | |
| Tel: 957-2126 |
March 5, 1990
Dear Sir:
Re: Non-resident owned investment corporations ("NROs") Paragraph 115(1)(b) and subsection 48(3) of the Income Tax Act (the "Act")
This is in reply to your letter of October 18, 1989 in which you asked for our views on a situation involving the above-mentioned subject and provisions of the Act.
a) Situation
1. Mr. A holds 100% of the shares of A Limited, an NRO.
2. A Limited was incorporated in Canada after 1971.
3. Mr. A became a Canadian resident during January of 1990.
4. A Limited holds real property situated in Canada and holds shares of public corporations. The real property is less than half the value of the company's total assets. The holdings of the public corporations are less than 25% of the public corporations' stock.
b) Our Opinion
1. Subsection 48(3) of the Act would not apply to the A Limited shares owned by Mr. A at the time he became a Canadian resident because such shares were taxable Canadian property immediately before that particular time. The A Limited shares were taxable Canadian property because A Limited was an NRO and it owned the type of property described in clauses 115(b)(v)(A) to (D) of the Act on the first day of its taxation year commencing before the particular time Mr. A became a resident of Canada.
2. Subsection 48(3) of the Act will not apply to A Limited when Mr. A becomes a Canadian resident, even though A Limited was an NRO up to that time, because A Limited has always been resident in Canada.
3. While a corporation is an NRO, it may dispose of all its property which is not taxable Canadian property with no Canadian income tax consequences. However, once one of the corporation's shareholders becomes resident in Canada, the corporation loses its NRO status. Capital gains on the disposition of its underlying assets, which are not taxable Canadian property, will be subject to tax at the time of disposition of such assets. This capital gain will be calculated based on the original cost of these assets to the corporation and not the value of these assets at the time the shareholder or shareholders of the corporation became resident in Canada. If the corporation only owned property that is not taxable Canadian property at the time, one of it's shareholders become resident in Canada subsection 48(3) of the Act would apply to that shareholder's shares at that particular time because the shares are not taxable Canadian property. However, if the corporation owned both property that would be considered to be taxable Canadian property and property that would not be considered to be taxable Canadian property immediately before its shareholders became Canadian residents its shares would be taxable Canadian property before that particular time. Accordingly, subsection 48(3) of the Act would not apply to the shares because of the exclusion in paragraph 48(3)(a).
We are not in a position to comment on whether or not the results set out above are inequitable but only an amendment to the Act could change them. As you are aware such amendments are the responsibility of the Department of Finance.
We trust this will be of assistance to you.
for DirectorReorganization andNon-Resident Division