Income Tax Interpretation Bulletin

Foreign Property of Registered Plans

NO: IT-412R2

DATE: January 16, 1995

SUBJECT: INCOME TAX ACT
Foreign Property of Registered Plans

REFERENCE: Subsection 206(1) (also section 205 and subsections 146(16), 206(2), 206(2.1), 206(3), 206(3.1) and 259(3) of the Income Tax Act, section 5000 of the Income Tax Regulations and subsection 65(5) of the Income Tax Application Rules)

Application

This bulletin cancels and replaces Interpretation Bulletin IT-412R dated November 6, 1989.

Summary

Certain trusts and corporations governed by deferred income plans may be subject to a special tax where more than 20% of the cost amount of their property consists of foreign property. This bulletin identifies the persons that may be subject to the special tax, discusses various investments and indicates whether or not they represent foreign property. In addition, the bulletin describes some rules that pertain to property that becomes foreign property after its acquisition.

Discussion and Interpretation

1. Trusts that are governed by, and many of the corporations that administer, registered plans such as registered pension plans, registered retirement savings plans and deferred profit sharing plans are generally exempt from tax under Part I. Except for the trusts for certain registered pension plans, the corporations and trusts are subject to tax under subsection 206(2) if their investments in foreign property exceed specified limits. Subsection 206(2) provides that where at the end of any month after 1993 the total of the cost amount of foreign property exceeds generally 20% of the cost amount of all property held at that time, the corporation or trust is subject to a tax of 1% of the lesser of the excess and the total of the cost amounts of all foreign properties acquired after June 18, 1971. "Cost amount" is defined in subsection 248(1). The specified limit for months in 1990, 1991, 1992 and 1993 is 12%, 14%, 16% and 18% respectively. The specified limit may be increased for taxpayers described in 2(a),(b),(c) or (e) below where the taxpayer holds certain small business property.

See the current version of IT-320, Registered Retirement Savings Plans - Qualified Investments, for additional observations on subsection 206(2).

2. Section 205 lists the taxpayers who may be subject to the special tax under subsection 206(2). The taxpayers are

Subparagraphs 205(a)(i) and (ii), referred to in (a) above, provide an exemption for either a trust which is established for the exclusive benefit of non-residents working outside Canada or a trust where the only beneficiaries are entitled to their benefits by virtue of employment outside Canada.

3. As supplemented by section 5000 of the Regulations, subsection 206(1) of the Act defines "foreign property" for the purpose of calculating the tax, if any, under subsection 206(2) for certain taxpayers listed in section 205. Foreign property includes

The statement in 3(e) does not apply to a share of a class listed on a prescribed stock exchange in Canada where no shares of that class have been issued after December 4, 1985 otherwise than pursuant to a written agreement entered into before 5:00 p.m. Eastern Standard Time on that day.

Refer to the definition of "foreign property" in subsection 206(1) of the Act and section 5000 of the Regulations for a listing of properties that constitute a foreign property.

4. Foreign property does not include

5. Paragraph (i) of the definition of "foreign property" in subsection 206(1) provides that except as prescribed by Regulation, any interest in, or right to acquire an interest in, a trust (other than a registered investment) or a partnership is foreign property. This means, for example, that an interest in a master trust is foreign property of a trust for a registered pension plan. However subsection 5000(1.2) of the Regulations provides that a property of a beneficiary of a master trust is not foreign property of the beneficiary at the time where

6. Pursuant to subsection 206(2.1), subsection 206(2) does not apply to a master trust or a corporation described in paragraph 149(1)(o.2) for any month that is covered by an election under subsections 259(1) and (3). (Subsection 259(3) permits a trust or a corporation to elect so that the beneficiaries of the trust or the shareholders of the corporation are considered to hold a proportionate interest in the underlying assets of the trust or corporation for the purposes of, among other things, the foreign property provisions of the Act.) Prior to 1992, such elections were only available to master trusts.

7. Property may become foreign property after it is acquired. For example, if a Canadian corporation has a portfolio of investments in Canada and abroad and some or all of the Canadian investments are realized and the proceeds disbursed, then the shares of the Canadian corporation become foreign property since they will derive their value primarily from foreign property as described in 3(e) above. For months ending after December 20, 1991, subparagraph 206(2)(a)(iii) provides that where property has become foreign property after its acquisition, its cost amount will not be included in calculating tax under subsection 206(2) for a period of 24 months after the time the property changed its status. In our example, if the shares of the Canadian corporation became foreign property on May 15, 1993 and they were not disposed of, the cost amount of the shares will not be included in the tax calculation under subsection 206(2) until May 31, 1995, the first end of the month following the 24 month period.

8. For months ending after December 20, 1991, subsection 206(3.1) extends the relief provided by subparagraph 206(2)(a)(iii) to two situations:

9. Where a taxpayer who held shares that were foreign property exempt from subsection 206(2) tax because they were acquired before June 19, 1971, exchanges them in an amalgamation after June 18, 1971 for new shares which are foreign property, the new shares do not retain that exemption except as noted in 10 below.

10. Subsection 65(5) of the Income Tax Application Rules provides that the loss of exemption referred to in 9 above will not occur where two or more mutual fund corporations amalgamate after May 25, 1976 and

11. Foreign properties that are identical properties acquired before June 19, 1971 form a pool separate from those acquired after June 18, 1971 for the purpose of determining whether a particular disposition is of property exempt from the foreign property rules (those properties acquired before June 19, 1971) or subject to the foreign property rules (those properties acquired after June 18, 1971). Dispositions will be considered as being first from the former pool and, when it is depleted, from the latter pool.

12. Provided that there is no change in the annuitant, the transfer of all of the property of a trust of an unmatured self-administered registered retirement savings plan from one trustee to another pursuant to subsection 146(16) does not constitute a disposition or acquisition for the purposes of subsections 206(1) and (2).

If you have any comments regarding the matters discussed in this bulletin, please send them to:

---

Explanation of Changes
for
Interpretation Bulletin IT-412R2
Foreign Property of Registered Plans

Introduction

The purpose of the Explanation of Changes is to give the reasons for the revisions to an interpretation bulletin. It outlines revisions that we have made as a result of changes to the law, as well as changes reflecting new or revised departmental interpretations.

Overview

The bulletin notes that while trusts that are governed by, and many of the corporations that administer, registered plans are generally exempt from Part I tax, they may be subject to tax under subsection 206(2) on their foreign property. The bulletin identifies the taxpayers who may be subject to tax under that subsection, describes some property that is foreign property and other property that is not and notes some special rules concerning foreign property.

The bulletin reflects amendments to the Income Tax Act resulting from S.C. 1994, c7, Sch.VIII (1993, c.24 - formerly Bill C-92) and S.C. 1994, c.21 (formerly Bill C-27).

Legislative and other changes

The Summary has been revised to note that corporations and trusts will not be subject to the special tax referred to in the bulletin if not more than 20% of the cost amount of the property of the corporation or trust is foreign property and to describe more fully the contents of the bulletin.

New No 1 has been added to provide some comments on the special tax described in subsection 206(2).

No 2, (former No 1) has been expanded to identify all of the taxpayers who may be subject to the special tax on foreign properties.

No 3(f) reflects a Bill C-27 amendment to paragraph (g) of the definition of "foreign property" in subsection 206(1). (The former No 2(f) was an example of that paragraph.) The list in No 3(f) is the complete list of institutions described in paragraph (g) of the definition of "foreign property" in subsection 206(1).

No 3(g) is a new subparagraph which has been added to No 3 (former No 2) to note that, with exceptions, the capital stock of an investment corporation is foreign property.

No 4(f) is a new subparagraph which has been added to No 4, (former No 3) to describe an additional type of property that is not foreign property.

New No 5 has been added to describe subsection 5000(1.2) of the Regulations which provides an exception to paragraph (i) of the definition of "foreign property" in subsection 206(1).

New No 6 has been added to describe subsection 206(2.1) which exempts master trusts and corporations described in paragraph 149(1)(o.2) from the application of subsection 206(2) where an election is made under subsection 259(3) to have the "look-through" rules in subsection 259(1) apply. Bill C-27 extensively amended section 259 and revised subsection 206(2.1) to add a reference to corporations described in paragraph 149(1)(o.2).

New No 7 describes subparagraph 206(2)(a)(iii) (added by Bill C-92) which applies where property became foreign property after its acquisition to provide a period of time before subsection 206(2) becomes applicable.

New No 8 describes subsection 206(3.1) (added by Bill C-92) which extends the relief provided by subparagraph 206(2)(a)(iii) to situations where there has been a corporate merger, reorganization or change in control of a corporation.

No 11 (former No 6) has been revised to better describe what property is the taxable pool with regard to identical properties.

No 12 (former No 7) has been revised to clarify the conditions under which the property of an RRSP can be transferred from one trustee to another so that the transfer will not be regarded as a disposition or acquisition for the purposes of subsections 206(1) and (2).

Throughout the bulletin we have changed some of the wording and the order of some paragraphs to improve readability without altering the substance. In addition, statements concerning dates which are no longer relevant have been removed.