Subsection 133(1) - Computation of income
Cases
MNR v. Peninsular Investments Ltd., 63 DTC 1149 (Ex Ct)
The taxpayer, which was a non-resident-owned investment corporation that invested in shares and bonds, sought to deduct interest paid by it on a significant bank overdraft. That deduction was denied by s. 70(1) of the pre-1972 Act (now, s. 133(1)(a)), which provided that "no deduction shall be made in respect of interest on its bonds, debentures, securities or other indebtedness."
Thurlow J. accepted (at p. 1153) that the indebtedness referred to in the quoted statutory phrase "ordinarily at least is indebtedness arising from the acquistion of capital assets or the raising of capital to be employed in its business rather than indebtedness of the kind incident to and incurred in the day-to-day trasactions of the business." Here, however, the taxpayer had not established that it "was engaged in a business as opposed to merely holding investments" (p. 1152), and even if it had a business, it would not have established that "the financing of its transactions was itself an integral part' of such business (p. 1154). Accordingly, the interest was not deductible.
Administrative Policy
5 March 1990 T.I. (August 1990 Access Letter, ¶1383)
Discussion of the consequences of ceasing to qualify as an NRO.
Articles
Rohde, "NROs - Some New Developments", Tax Profile, Vol. 4, No. 34, April 1996, p. 382.
Lanthier, "Acquiring, Holding and Financing Canadian Corporations", Bulletin for International Fiscal Documentation, Vol. 48, No. 8/9, August/September 1994, Special IFA issue, p. 419.
Broadhurst, "Financing by Non-Residents", 1992 Corporate Management Tax Conference Report, c. 9.
Aud, "Tax Havens - What Benefits Still Exist?", International Tax Report, August 1992
U.S. multinationals use an NRO in conjunction with a Canadian operating subsidiary as a financing vehicle.
McGuffin, "Financing a Canadian Subsidiary Through an NRO", The Journal of International Taxation, November/December 1991, p. 235.
Subsection 133(8) - Definitions
Cumulative Taxable Income
Cases
The Great Atlantic and Pacific Tea Co. Ltd. v. The Queen, 79 DTC 5401, [1979] CTC 509, [1980] 1 S.C.R. 670
The argument of the taxpayer that s. 133(9)(b)(ii) did not require that the taxation year have been completed in order for taxable income earned prior to the particular time to be included in its cumulative taxable income was rejected in light of the reference in the preamble of ss.133(9)(a) and (b) to "at any particular time" and in light of "the practical requirement that the ascertainment of the various quantities going into the computations in these subparagraphs must be possible at the moment in question."
Non-Resident-Owned Investment Corporation
Cases
Banner Pharmacaps NRO Ltd. v. The Queen, 2003 FCA 367, 2003 DTC 5642 (FCA)
The taxpayer argued that it was in the business of making loans on the basis that the Canadian corporation in which it was invested had declared a dividend and a reduction of stated capital payable, each case, "by the issuance of a demand promissory note."
Sharlow JA found that the Tax Court Judge had erred in finding that the dividend was includable in the income of the taxpayer in the year of declaration on the basis that the taxpayer was required to compute its income on a accrual basis: "The clear result of the combined operation of paragraph 12(1)(j) and clause 82(1)(a)(ii)(A) of the Income Tax Act is that such dividends are taxable only when received, not when they are merely receivable" (para. 6). However, the dividend was actually received in the year of declaration given that the expressed intention was for the dividend to be paid by means of delivery of a promissory note.
Mogan TCJ had correctly concluded that the principal business of the taxpayer was not the making of loans given that there was no evidence that it had ever lent money to another party on the condition that the money be repaid, and there thus is no evidence that it had made any loans at all, much less carried on a money lending business.
Deltona Corp. v. MNR, 71 DTC 5186, [1971] CTC 297 (Ex Ct), briefly aff'd 73 DTC 5180, [1973] CTC 215 (SCC)
At 11:00 a.m. on March 28, 1966 a subsidiary ("Deltona Canada") of the taxpayer elected to be an NRO, at 3:30 p.m. the shareholders of Deltona Canada resolved that its assets be distributed and its charter surrendered, and at 3:45 p.m. the directors of Deltona Canada declared a dividend of $2,509,158 and conveyed its assets to the taxpayer. The election was a nullity. "Where the several corporate acts at the time of the purported election, taken as a whole, make it clear that the corporation intends to rid itself of its property and surrender its charter so that it cannot be taxed, in my view it has in fact, decided not to exist and not to be taxed at all. A purported election 'in prescribed manner' based on a decision not to be taxed is not, in my view, an election 'to be taxed'".
See Also
No. 479 v. MNR, 58 DTC 9, 18 Tax ABC 272
Fees received by the taxpayer for guaranteeing loans made by a non-resident bank to non-resident persons were characterized as service fees rather than returns on the ownership of assets described in the definition.
Administrative Policy
5 November 1999 Memorandum 991063
Where a promissory note is issued to pay a dividend, the creditor (in this case, an NRO) will not be considered to have made a loan because no borrower-lender relationship will have been created as a result of the issuance of the promissory note.
5 July 1995 T.I. 5-950242 -
If one to six months after a bank has lent funds to Canco, the newly incorporated Canadian parent of Canco ("Newco") purchases the indebtedness from the bank, such acquisition will not cause Newco to have as its principal business the making of loans.
18 February 1994 T.I. 932405 (C.T.O. "NRO - 'Making of a Loan' (HAA) 6666-1)")
Where an NRO is owed a loan receivable from a related taxable Canadian corporation, the making of an election under s. 78(1), or a change to the loan agreement in such a manner that the existing debt obligation is considered to have been disposed of, will result in the NRO being considered to have made a loan to the affiliate.
23 November 1992 T.I. 920625 (September 1993 Access Letter, p. 421, ¶C117-205)
In determining whether the principal business of a supposed NRO was trading in securities, it was necessary to determine whether the activities and types of assets in question resulted in the corporation being considered to earn business income rather than income from property.
October 1992, Central Region Rulings Directorate Tax Seminar, Q. E (May 1993 Access Letter, p. 229)
Funded indebtedness refers to debt obligations that relate to the capital structure of the company, and include bonds, debentures and long-term notes.
16 September 1992 T.I. (Tax Window, No. 24, p. 14, ¶2193)
Because the intention of the NRO legislation is not to provide Canadian investors with another vehicle for their investment portfolio, RC will look beyond the legal title of shares of a corporation to determine its beneficial ownership. In other words, "beneficial ownership" is not synonymous with "ownership". Canadian shareholders cannot beneficially own an NRO through foreign corporations in which their equity percentage is insufficient to constitute the corporation a foreign affiliate.
ATR-43, February 17, 1992
The U.S. parent ("US Co.") of a Canadian subsidiary ("Canco") establishes a wholly-owned subsidiary ("Newco") which is intended to be an NRO, and transfers all its shares of Canco to Newco in consideration for common shares of Newco. Canco borrows money from a Canadian chartered bank and uses the proceeds to reduce the stated capital of its common shares held by Newco which, in turn, invests the proceeds in an interest-bearing deposit. Newco later uses the deposit to purchase Canco's indebtedness from the bank.
The acquisition of the loan will not cause Newco to be engaged in the principal business of making loans as envisaged by s. 133(8)(d)(iv)(A).