Relief for foreign withholding tax on dividends subject to s. 113(5) (under “2. Recognition of Foreign Withholding Tax”)
- Where a dividend is subject to the denial of the s. 113 deduction by s. 113(5) for a dividend received from a foreign affiliate, no deduction is available under s. 113(1) for foreign withholding tax paid on the dividend, and the dividend remains “income from a share of the capital stock of a foreign affiliate of the taxpayer”, such that no foreign tax credit under s. 126(1) nor deduction under s. 20(12) is available for the foreign withholding tax paid on the dividend.
- It is recommended that relief be provided for foreign withholding tax paid on dividends that are subject to s. 113(5) by modifying it to allow grossed-up deductions for such withholding tax.
Recommended exclusion of ss. 12.7 and 18.4 from the foreign affiliate context (under “3. Application to Foreign Affiliates”)
- Where, for example, a FAPI-earning controlled foreign affiliate has issued a financial instrument that is treated as debt from a Canadian perspective and as equity from a foreign tax perspective, it seems inappropriate to deny a deduction in computing such FAPI through an extension to such context of the proposed hybrid mismatch rules, given that if this instrument had instead been treated as equity from a Canadian perspective, such that there would not have been any deduction in computing FAPI for the “interest” payments, the existence of the instrument would have in any event resulted in a reduction of the Canadian taxpayer’s participating percentage in respect of the affiliate, and thus a corresponding reduction of attributed FAPI.
- It is recommended that s. 95(2)(f.11)(ii)(A) be expanded to exclude the application of ss. 12.7 and 18.4 in computing a foreign affiliate’s income from property, income from a business other than an active business and income from a non qualifying business.
Ambiguity as to whether general deductions come within the (a)(iii)(A) and (B) exclusions (under 4. “Canadian Ordinary Income” & “Foreign Ordinary Income” Definitions”)
- The relevant portions of the definitions of Canadian ordinary income (e.g., (a)(iii)(A) and (B) and foreign ordinary income should be clarified so that inclusions for a particular amount are not reversed as a result of any deductions or other relief that may be applicable as a result of other payments – that is, payments other than the payments that give rise to the included amounts. - For example, if a taxpayer borrows money at interest from a third party for the purpose of making an interest-bearing loan to a subsidiary, the taxpayer’s interest revenues would be expected to result in Canadian ordinary income, so that there would be considered to be an income inclusion in Canada.
Potential double taxation through considering there to be a mismatch where the amount is deductible (but not actually deducted) in the foreign jurisdiction (under “6. Proposed Subsection 18.4(6): Application to Deductible Amounts)
Variable “C” of proposed paragraph 18.4(6)(b) determines whether a payment gives rise to a deduction/non-inclusion mismatch by reference to whether the payment would be, or would reasonably be expected to be, in the absence of any foreign expense restriction rule, deductible in computing foreign income. It appears the test of “deductible” as opposed to a test of “deducted” could give rise to double taxation due to the application of proposed section 12.7 where there is in fact no deduction taken in the foreign jurisdiction. This issue is particularly relevant for the notional interest expense rule in proposed subsection 18.4(9), which does not require an actual payment. ...
We recommend that the test of “deductible” be changed to a test of “deducted”, at the very least, in proposed subsection 18.4(9).
More explicit exclusion needed for mere security arrangements (under “9. Proposed Subsection 18.4(17) & Security Interests”)
The “specified entity” rules should contain an express exclusion for arrangements that secure indebtedness, equivalent to the exclusion provided in subsection 18(5.1).
Need for a relieving rule for timing mismatches that produce income inclusions under s. 12.7(3) (under “10. Timing Mismatches and Proposed Subsection 12.7(3)”)
- S. 20(1)(yy) only relieves where the application of the hybrid mismatch rules results in the denial of a deduction under s. 18.4(4), and not where there is an income inclusion under s. 12.7(3), i.e., if a payment under a hybrid mismatch arrangement produces a foreign tax deduction in a particular foreign taxation year, and Canadian ordinary income in a taxation year beginning more than 12 months after the end of the particular year, the recipient of the payment is required to include an amount in its income under s. 12.7(3), notwithstanding that an amount is also included in Canadian ordinary income under the general Canadian income tax rules.
Absence of a Part XIII refund mechanism for where a s. 20(1)(yy) deduction is generated (under “11. Proposed Paragraph 20(1)(yy) & Dividend Withholding Tax”)
- Where s. 18.4(4) denies a deduction for an amount paid as interest, s. 214(18) deems such amount to have been paid as a dividend for Part XIII purposes. Where a deduction is subsequently provided under s. 20(1)(yy) (i.e., because such amount is demonstrated to be foreign ordinary income that has not previously been taken into account), the draft rules do not currently provide for any refund or reduction of the withholding tax that would result from such deemed dividend treatment.
- Where the Part XIII tax so provided for was withheld and remitted, such relief could be accomplished through an expansion of s. 227(6.1). However, where the Part XIII tax has not been withheld or remitted—for example, because the taxpayer did not take the view that withholding was required, and CRA subsequently disagrees, anomalous and punitive results can occur.
- Instead, a provision could be introduced following s.215(6) that deemed an amount to have been remitted on account of the Part XIII tax that was not withheld or remitted in circumstances where s. 227(6.1) would provide for a refund of tax that was remitted.
Email this Content