5 December 2005 External T.I. 2004-0078921E5 - Foreign accrual tax

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Must the foreign affiliate that realizes FAPI also be the affiliate that pays the foreign tax to take that foreign tax paid into account in the amount provided for in subparagraph (a)(i) of the definition of foreign accrual tax in subsection 95(1) of the Act?

Position: Yes

Reasons: The words "in respect of a particular foreign affiliate" are not considered to modify only the words "foreign accrual tax" but modify all the preamble. Previous position.

XXXXXXXXXX Sylvie Labarre,CA
2004-007892
December 5, 2005

Dear XXXXXXXXXX

Re: Foreign accrual tax

We are writing in response to your email of May 6, 2004 wherein you requested information concerning the foreign accrual tax, as defined in subsection 95(1) of the Income Tax Act (the "Act") in the following situation.

Two or more foreign affiliates file on a consolidated basis and one affiliate pays tax to the foreign government in respect of foreign accrual property income (FAPI) earned by a second affiliate.

The question is whether the affiliate that realizes FAPI must also be the affiliate that pays the foreign tax to include an amount under subparagraph (a)(i) of the definition of "foreign accrual tax" in subsection 95(1) of the Act (hereinafter the "Definition").

Our comments

Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.

In your view, the affiliate that pays the foreign tax does not need to be the affiliate that realizes the FAPI because the expression "for the taxation year in respect of a particular foreign affiliate", used in the preamble of the Definition, modifies the expression "foreign accrual tax".

We disagree with your view that the expression "in respect of a particular foreign affiliate" modifies only the words "foreign accrual tax" and with your interpretation of subparagraph (a)(i) of the Definition. In our view, the expression applies to the whole preamble including the following part: "the amount included in income by virtue of subsection 91(1)". The particular affiliate must be both the source of the FAPI and the payer of the foreign tax to include an amount under subparagraph (a)(i) of the Definition for that particular affiliate. Since, in the situation described, the affiliate who pays the tax is not the affiliate who earned the FAPI, the tax paid to the foreign government would not be foreign accrual tax under subparagraph (a)(i) of the Definition.

However, we would have to determine in any particular situation whether subparagraph (a)(ii) of the Definition or subsection 5907(1.3) of the Income Tax Regulations could have application.

We trust the above has been of some assistance and we regret the delay in responding..

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch