24 November 2013 CTF Roundtable, 2013-0508171C6 - Income or profits 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: When will a tax on gross revenue qualify as an income or profits tax?

Position: When it is determined that the tax on gross revenue option is part of a comprehensive income tax regime and is tightly linked and subordinate to what would otherwise be accepted as an income or profits tax.

Reasons: When the tax on gross revenue is an annual option available under the same statute as another tax that is computed by reference to net income which itself is not of such an unreasonably high rate as to remove the elective nature of a taxpayer's choice between the two options, the tax on gross revenue will arguably be computed indirectly by reference to net income. Moreover, given that a taxpayer has an opportunity to elect annually to choose whether to be taxed on gross revenue or on net income, the tax paid should generally be limited to a maximum amount equal to the amount of tax that would be computed if the tax had been computed by reference to net income.

National CTF Conference
November 24 - 26, 2013

Question

A tax paid to a foreign country must be an "income or profits tax" in order to qualify for the determination of a foreign tax credit or a deduction in the computation of income or taxable income (consider for example sections 126 and 113 of the Act).

For these purposes, can a tax on gross revenue qualify as an income or profits tax?

CRA Response

The CRA recently took the position that a tax paid to Guatemala on gross revenue does qualify as an income or profits tax. In the context of this recent interpretation request we concluded that we will generally accept that tax paid to a foreign country will be an income or profits tax notwithstanding that it is computed by reference to gross revenue if the tax is part of a comprehensive income tax regime and is tightly linked and subordinate to a tax that is computed by reference to income or profits.

The existence of all of the following factors would be considered indicative of such a tax on gross revenue:

• a single tax statute contains the option to pay tax on gross income or tax on net income;
• there is the ability to elect annually between the two taxation regimes; and
• the rate of tax applied on net income is not unreasonably high.

When all of the above factors are present, we would expect that any resulting tax on gross revenue would generally be capped at what the tax on net income would have been. As a result, we are prepared to view the tax on gross revenue as being indirectly computed in reference to income or profits and, therefore, accept that it is an income or profits tax for purposes of the Act.

The next update to the Foreign Tax Credit Folio (S5-F2-C1) will reflect this recent interpretation.

Lori Carruthers
2013-050817