17 September 2004 Internal T.I. 2004-0087081I7 - Foreign affiliates - retroactive

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: Whether a refund of foreign taxes received by foreign corporation after it ceased to be a foreign affiliate of the particular corporation in Canada is a refund received by a "foreign affiliate" for the purposes of clause 5907(1.1)(a)(v)(B) of the Regulations.

Position: No

Reasons: The reference in clause 5907(1.1)(a)(v)(B) is to the foreign affiliate of the particular corporation resident in Canada in respect of which the surplus calculation is being made. At the time the refund was received, the foreign corporation was not a foreign affiliate of the relevant Canadian corporation.

 			September 17, 2004

	COMPLIANCE PROGRAMS BRANCH	HEADQUARTERS
	International Tax Directorate	Income Tax Rulings
			  Directorate
	Attn:  Tim Kuss
			2004-008708

We are responding to your memo of July 2004 wherein in you request our view concerning an issue arising in connection with an audit of a client by the Toronto Center TSO. Our understanding of the issue is as follows:

1) A group of U.S. foreign affiliates of a Canadian company ("Canco") file their tax returns in the United States on a consolidated basis.

2) Canco's interests in the group are held though a U.S. holding company which acts as the "primary affiliate" responsible for paying and claiming any refund of U.S. taxes on behalf of itself and other members of the group.

3) Members of the group have incurred certain losses for U.S. tax purposes at a time when every member of the group still qualified as a "foreign affiliate" of Canco.

4) The shares of the Holdco are sold by Canco thus every member of the group ceases to be a foreign affiliate of Canco.

5) Subsequent to the transaction described in paragraph 4 above, Holdco files certain claims to carry back the losses described in paragraph 3 above to other taxation years ending at time when all the members of the group were foreign affiliates of Canco.

6) As a result of the claims described in paragraph 5 above, Holdco receives a refund of U.S. taxes.

You request our view whether the surplus accounts of the Holdco would be retroactively adjusted upward in respect of the income tax refund pursuant to subparagraph 5907(1.1)(a)(v) of the Regulations to the Act.

Our Comments

In our view subsection 5907(1.1) does not apply in the above circumstances to adjust upward the surplus accounts of Holdco vis-à-vis Canco. Clause 5907(1.1)(a)(v)(B) applies where "the primary affiliate receives...a refund of income or profits tax ...". The term "primary affiliate" referred to in clause 5907(1.1)(a)(v)(B) of the Regulations is defined in the preamble to that subsection and therefore must be a foreign affiliate of a corporation resident in Canada (i.e. Canco). On the facts, as Holdco was not a foreign affiliate of Canco at the time the refund referred to in paragraph 6 above was received, it is our view that the conditions for the application of clause 5907(1.1)(a)(v)(B) are not met. This view is consistent with the conclusion of the Tax Court of Canada in Trans World Oil and Gas v The Queen, 95 DTC 260, where it was decided that the reference to "foreign affiliate" in paragraph 5903(1)(b) of the Regulations had to be to a foreign affiliate of the same corporation in respect of which the FAPI was to be determined.

Olli Laurikainen
for Director
International and Trusts Division
Income Tax Rulings Directorate