Principal Issues: How to determine whether more than 50% of the fair market value of a share is derived directly or indirectly from certain property.
Position: see attached.
Reasons: see attached.
International Fiscal Association (IFA) Conference
Canada Revenue Agency Roundtable
May 17, 2012
Definition of Taxable Canadian Property
Considering August 27/10 proposed changes to the taxable Canadian property ("TCP") definition in subsection 248(1) of the Act and Roundtable response to Q13 from the 2011 Canadian Tax Foundation Conference could the CRA provide comments on the following:
1. In assessing the amount of immovable property that a Parent derives from shares of a Subsidiary what is the correct approach
a) full value approach;
b) proportionate value approach; or
c) consolidated gross asset approach?
In answering, consider the current wording and the proposed August 27, 2010 wording of the TCP definition,
2. How would a debt between a Parent and a wholly-owned Subsidiary impact the determination?
3. Are investments in partnerships treated differently than investments in shares of a Subsidiary for purposes of determining a Parent's investment in immovable property?
Response
1. The CRA is of the view that the determination of whether a share of a corporation derives its value principally from real or immovable property situated in Canada (and certain other property listed in subparagraphs (d)(ii), (iii) and (iv) of the definition of "TCP" in subsection 248(1) which for the purposes of the remainder of our response will be included when we refer to "real or immovable property situated in Canada") should be made by reference to the FMV of the properties of the company without taking into account its debts or other liabilities.
Where a non-resident disposes of shares of a Parent corporation that has a Subsidiary the CRA uses the proportionate value approach in determining to what extent the shares of the Subsidiary represent real or immovable property of the Parent. A determination will need to be made of the fair market value (FMV) of the shares of the Subsidiary. Moreover, a determination will need to be made of the proportion of the total gross assets of the Subsidiary that comprises of real or immovable property situated in Canada. Under the current wording of the "TCP" definition, an amount equal to that same proportion of the FMV of the shares of the Subsidiary will be considered real or immovable property situated in Canada of the Parent in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.
On August 27, 2010 the Department of Finance released draft legislation applicable after March 4, 2010, that would prevent indirect "look-through" to the property of the Subsidiary in the event that the shares of the Subsidiary would not themselves be TCP at the particular time. If such legislation is enacted as proposed and the shares of the Subsidiary would not themselves be TCP, the full value of the shares of the Subsidiary owned by the Parent will be viewed as property other than real or immovable property situated in Canada in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.
2. Indebtedness between a Parent and a wholly-owned Subsidiary has no impact on the determination of whether the value of the shares of the Parent was derived directly or indirectly from real or immovable property situated in Canada. If the shares of the Parent would be TCP had the Parent capitalized its wholly-owned Subsidiary with only equity, then such shares will be considered TCP if the Parent capitalizes the Subsidiary in part with equity and in part with debt.
3. When testing whether a share of a corporation that has an interest in a partnership derives its value principally from real or immovable property situated in Canada, the CRA is of the view that the analysis should proceed on the same basis as where the corporation holds shares in another corporation.