29 October 1997 External T.I. 9719055 - 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

971905
XXXXXXXXXX Tim Kuss

Attention: XXXXXXXXXX

October 29, 1997

Dear Sirs:

Re: Subsection 91(4) - Foreign Accrual Tax

We are writing in response to your letter dated July 14, 1997 requesting a technical interpretation concerning the definition of "foreign accrual tax" in subsection 95(1) and its impact on the deduction provided in subsection 91(4). You have also asked for our opinion as to the "foreign accrual tax applicable" in the following hypothetical situation:

Income of Affiliate Year 1 Year 2 Year 3 Total

Fapi income $100 $100 $100 $300
Active business Income (50) (130) 500 320
Net income (loss) 50 (30) 600 620
Loss carried forward n/a n/a (30) n/a

Taxable Income $50 $nil $570 $620

Foreign tax paid or
payable @ 36% $18 $nil $205 $223

We provide the following general comments.

In order for a foreign income or profits tax to qualify as foreign accrual tax it must be paid. Although the tax may not be paid at the affiliate's year end, provided it is paid in due course when the affiliate's tax return is filed, the tax will be considered paid in respect of the year to which it relates. If an affiliate's tax return for a particular year is reassessed and a refund is provided for that year, the income or profits tax paid for that year (for purposes of the definition of foreign accrual tax) would be the reassessed amount and not the tax that was paid when the return for the particular year was first filed.

"Foreign accrual tax applicable" is the portion of the income or profits tax that may reasonably be regarded as applicable to the amount included in income under subsection 91(1). This determination is made on a case by case basis based on the facts available at the particular time.

In the above hypothetical situation, it is our opinion that the foreign accrual tax for Year 1 would be $18, while the foreign accrual tax for Year 3 would be $90 ($250 x 36%). This is based on the fact that over the three year period the total Fapi is $300 and the total active business income is $320. In these circumstances, it is our view that the total tax of $223 should be allocated to the Fapi on a 300/620 ratio (300/620 x $223 = $108). As the $18 paid in Year 1 clearly relates to the Fapi, it is our opinion that $90 of the tax paid in Year 3 reasonably relates to the Fapi for that year.

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch