CRA confirms that an IC-DISC qualifies as a U.S. resident for Treaty and surplus purposes

Exempt earnings of a foreign affiliate include its net earnings from an active business carried on in a designated treaty country if it is resident in that country. Reg. 5907(11.2)(a) provides that it is deemed to not be resident in that country unless it is resident there for purposes of the relevant Treaty.

CRA confirmed its position that:

[W]here a person’s worldwide income is subject to a particular Contracting State’s full taxing jurisdiction but that Contracting State’s domestic law does not levy tax on the person’s taxable income … we will generally accept that the person is a resident of that Contracting State unless the arrangement is abusive … .

CRA then confirmed that an “Interest Charge Domestic International Sales Corporation,” so qualified, i.e., a U.S. subsidiary of a Canco that earned profit on an exempted basis on the sale of goods manufactured by another U.S. subsidiary for export. CRA’s discussion suggest that it is not confident that such an exempted U.S. corporation would be resident in the U.S. if its central management and control was in Canada (there perhaps is a concern that s. 250(5) only deems corporations to be non-resident generally rather than to be resident in a specific country).

Neal Armstrong. Summary of 24 May 2018 External T.I. 2017-0710641E5 under Reg. 5907(11.2).