n-2000-7.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

Section 1504(d) Elections - Deferral of Termination

Notice 2000-7

## PURPOSE

The purpose of this Notice is to provide guidance regarding the effect of the
repeal of certain Canadian banking legislation on elections under section 1504(d) of
the Internal Revenue Code.

## BACKGROUND

Section 1504(d) of the Code allows, in certain circumstances, a domestic
corporation owning or controlling, directly or indirectly, 100 percent of the capital stock
of a Mexican or Canadian corporation, to elect to treat such corporation as a domestic
corporation for all purposes of subtitle A of the Code. Among other requirements, such
an election may be made only if the sole purpose for maintaining such corporation is to
comply with Canadian or Mexican law regulating the title and operation of property.

If an election under section 1504(d) is in effect with respect to a Canadian or
Mexican corporation, and the relevant provision in Canadian or Mexican law regulating
the title and operation of property is repealed, it is the view of Treasury and the IRS
that the election under section 1504(d) generally is terminated as of the effective date
of the repeal. However, a foreign corporation may continue to be viewed as maintained
solely for the purpose of complying with Canadian or Mexican law for a short period of
time following the repeal of that foreign law if the taxpayer takes reasonable and
expeditious measures to respond to the change in foreign law and for good reason is

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unable to complete such measures by the effective date of the repeal, as would be the
case if the taxpayer is required to obtain regulatory approval in order to convert the
foreign corporation to a branch of the U.S. parent and cannot obtain such approval by
the effective date of the repeal. In such a case, the foreign corporation will continue to
be viewed as maintained solely for the purpose of complying with Canadian or Mexican
law only for so long as is reasonably necessary to convert to branch form and only for
so long as the taxpayer persists in its efforts to convert to branch form during that
period. The IRS may issue guidance identifying whether and the extent to which this
short period of time exists in appropriate circumstances not specifically addressed by
this Notice. Following the end of any such period (or immediately upon the effective
date of the repeal of the foreign law if there is no such period), if the foreign corporation
remains in existence, it is no longer maintained solely for the purpose of complying with
the repealed foreign law.

### Repeal of Canadian Banking Legislation

Until recently, Canada prohibited foreign banks from operating in branch form
within Canada, under the Bank Act (Canada), S.C. 1991, c. 46 ("Original Act").
Canadian banking operations of a foreign bank were required to be conducted within a
Canadian corporation. Thus, Canadian banking subsidiaries of U.S. banks may have
qualified for the election under section 1504(d).

Effective June 28, 1999, the Original Act was amended to permit foreign banks
to perform certain specified banking functions in Canada directly through foreign
branches rather than through Canadian subsidiaries ("Amended Act"). Under the

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Amended Act, all Canadian subsidiaries of foreign banks seeking to convert to a
branch operation must obtain the approval of the Minister of Finance and the Office of
the Superintendent of Financial Institutions.

In addition, on May 11, 1999, the Canadian government announced its intention
to enact legislation that would allow an indefinite deferral of the Canadian tax imposed
upon the liquidation of a Canadian banking subsidiary as part of its conversion to
branch form ("Relief Legislation"). Department of Finance Release 99-044 (May 11,
1999). Under the Relief Legislation, relief will be available only if the bank complies,
on or before December 31, 2000, with paragraphs 1.0(1.1)(b) and (c) of the draft
"Guide to Foreign Bank Branching" issued by the Office of the Superintendent of
Financial Institutions ("Foreign Branch Guide"). In addition, the Canadian banking
subsidiary must complete its conversion to branch form on or before the earlier of (i)
the day that is six months after the day that the Superintendent of Financial Institutions
makes an order in respect of the foreign bank under subsection 534(1) of the Amended
Act, or (ii) December 31, 2002. The terms of the proposed Relief Legislation indicate
that Canada has determined that the period described above is a reasonable period for
taxpayers to take the steps necessary to convert to branch form.

### Effect of Repeal of Canadian Banking Legislation

Except as provided in the following sentence, a Canadian banking subsidiary
that was, immediately prior to June 28, 1999, maintained solely for the purpose of
complying with the Original Act shall be considered to be maintained solely for the
purpose of complying with the Original Act until the earlier of the date that is six months

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after the day that the Superintendent of Financial Institutions makes an order in respect
of the foreign bank under subsection 534(1) of the Amended Act, or December 31,
2002. If, however, the bank does not comply with paragraphs 1.0(1.1)(b) and (c) of the
Foreign Branch Guide on or before December 31, 2000, the Canadian banking
subsidiary shall be considered to be maintained solely for the purpose of complying
with the Original Act only until December 31, 2000.

After the applicable period described in the preceding paragraph, any Canadian
banking subsidiary remaining in existence shall be maintained solely for the purpose of
complying with foreign law as to title and operation of property only if it is maintained
solely for the purpose of complying with the Amended Act or any other applicable
Canadian law regulating the title and operation of property.

The principal author of this notice is Kenneth D. Allison of the Office of Associate
Chief Counsel (International). However, other personnel from the IRS and the
Treasury Department participated in its development. For further information regarding
this notice contact Mr. Allison at 202-622-3860 (not a toll-free call).