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.
Principal Issues: (a) Whether the CCRA's position as stated in Window On Canadian Tax under the heading of "Foreign Exploration and Development Expenses Could be Lost" (#1563) dated November, 1991 (the "1991 Letter") in respect a "deductible amount", would remain unchanged. (See our file #E9131130 dated November 21, 1991.) (b) Whether a recent proposed amendment to subsection 66(4) of the Act would have any impact on our views.
Position: (a) With respect to the issue of deductible amount, the CCRA's position in the 1991 Letter regarding foreign resource income would remain unchanged but the position regarding the 10% discretionary claim would be amended as described below effective on the date of this letter and thereafter. (b) The recent proposed amendment to subsection 66(4) of the Act as described below would have impact on this revised position effective for 1995 and subsequent taxation years, provided that this proposed change would be enacted into the Act. As a result, this further revised position would now be consistent with the CCRA's position in the 1991 Letter.
Reasons: (a) Given the jurisprudence in respect of the issue on "deductible" vs. "deducted" and the CCRA's comments in the Interpretation Bulletin IT-270R2 in respect of the issue of "amount not deductible" vs. "amount not claimed and deducted", for the first example in the 1991 Letter wherein the taxpayer could have claimed a 10% maximum deduction of $100 - he may claim an amount not exceeding 10%, but did not do so, it is our view that in determining the taxpayer's subsection 66(4) claim for 1992, the amount of 1991 FEDE which was not deductible in 1991 for the purpose of paragraph 66(4)(a) of the Act would be $900 instead of $1,000. As a result, the CCRA's position in the 1991 Letter in respect of the 10% discretionary claim would be amended accordingly effective on the date of this letter and thereafter. (b) Given that under the proposed subsection 66(4) of the Act a taxpayer "may deduct... such amount as the taxpayer claims... ", the better view is that this change would result in whatever amount claimed (i.e., not may be claimed) by the taxpayer under paragraph 66(4)(b)(i) of the Act in a taxation year would become deductible (i.e., may be deducted) by the taxpayer under subsection 66(4) of the Act for the taxation year. In other words, whatever amount not claimed under paragraph 66(4)(b)(i) of the Act would not be considered as deductible under subsection 66(4) of the Act. Accordingly, given this proposed change, in the first example in the 1991 Letter, the taxpayer could have claimed a 10% maximum deduction of $100 in Year 1 - he claims an amount not exceeding 10%, but did not claim anything. As a result, the amount that may be deducted in Year 1 would be the amount being claimed - nil. It is our view that in determining the taxpayer's subsection 66(4) claim for Year 2, the amount of Year 1 FEDE which was not deductible in Year 1 for the purpose of paragraph 66(4)(a) of the Act would be $1,000. This would now be consistent with the CCRA's position in the 1991 Letter and would be effective for 1995 and subsequent taxation years, provided this proposed change would be enacted into the Act.
Peter Lee
XXXXXXXXXX (613) 957-8977
2000-000710
Attention: XXXXXXXXXX
May 11, 2000
Dear Sir\Madam:
Re: Foreign Exploration and Development Expense ("FEDE") Deduction
This is in reply to your facsimile of January 28, 2000 wherein you have requested our view on the technical interpretation of subsection 66(4) of the Income Tax Act (the "Act"). In particular, you have asked us to confirm whether the Canada Customs and Revenue Agency (CCRA)'s position as stated in Window On Canadian Tax under the heading of "Foreign Exploration and Development Expenses Could be Lost" (#1563) dated November, 1991 (the "1991 Letter"), would remain unchanged. You have also requested our view on a recent proposed amendment to subsection 66(4) of the Act.
1991 Position on FEDE Deduction
1. It is stated in the 1991 Letter as follows:
In general terms, subsection 66(4) provides that a taxpayer who is resident in Canada throughout a taxation year may deduct the lesser of
(a) total foreign exploration and development expenses ("FEDE") incurred before the end of the taxation year to the extent they were not deductible in a previous year, and
(b) the greater of (i) such amount as the taxpayer may claim not exceeding 10% of the total FEDE determined under (a), and (ii) the aggregate of foreign source resource income for the year (excluding deductions under subsection 66(1), (3) and (4), subsection 66.1(2) or (3) or section 65).
Revenue Canada (now Agency) considered whether a taxpayer who had incurred FEDE in a previous year but did not claim the maximum available deduction under subsection 66(4) would be considered to have FEDE which was "not deductible" in a previous year.
For example, assume that in 1991 a taxpayer incurred $1,000 in FEDE. Under subsection 66(4), the taxpayer could have claimed a deduction of $100, but did not do so. The question is whether, in determining the taxpayer's subsection 66(4) claim for 1992, the amount of 1991 FEDE which was not deductible in 1991 is $900 or $1,000.
Revenue Canada is of the view that if the taxpayer's 1991 income from foreign resource properties as determined for purposes of subsection 66(4) was nil, then in 1992 the amount of 1991 FEDE which was not deductible in 1991 would be $1,000. If the taxpayer had claimed $100 in 1991, then in 1992 the amount of FEDE not deductible in 1991 would be $900.
However, if the taxpayer's 1991 income from foreign resource properties was greater than $100 and less than the 1991 FEDE of $1,000, then in 1992 the amount of 1991 FEDE which was not deductible in 1991 would be the total 1991 FEDE less the amount of the foreign resource income.
Deductible Vs. Deducted
2. The Concise Oxford Dictionary (7th ed.) defines the word "deductible" as "may be deducted".
In differentiating the term "deductible" from "deducted", Hamlyn, J.T.C.C. commented in the case of David M. Sherman, 00 DTC 1523 (TCC), as follows:
Parliament's choice of the words "may be deducted" is clear and precise; "may" is permissible and not mandatory. The words do not lend themselves to an interpretation "may be deducted and were not deducted".
... the Act in many instances distinguishes between amounts that "may be deducted" and amounts that "have been deducted"...
In my view, the words in section 127.531 are clear and unambiguous and they should simply be applied. This is consistent with the propositions recently applied by Madam Justice McLachlin in Shell Canada Ltd. v. Canada, S.C.C., file number 26596, October 15, 1999...
Where the provision at issue is clear and unambiguous, its terms must simply be applied...
The words "may be deducted" in section 127.531 contemplate that a taxpayer may have expenses available for determining minimum tax credits that he did not use, for whatever reason, in determining regular tax credits. If Parliament intended that the tax credits should be the same in determining regular tax payable and minimum tax payable, the words at issue in section 127.531 should be more specific.
See also the case of The Dominion of Canada General Insurance Company, 86 DTC 6154 (FCA) in respect of the issue on "deductible" vs. "deducted". See also Interpretation Bulletin IT-270R2 entitled Foreign Tax Credit dated February 11, 1991 which includes the CCRA's comments on the issue of "amount not deductible" vs. "amount not claimed and deducted". Given this jurisprudence and the CCRA's comments in this Interpretation Bulletin, in the above-noted first example wherein the taxpayer could have claimed a deduction of $100 (i.e., he had the entitlement of such a deduction claim), but did not do so, it is our view that in determining the taxpayer's subsection 66(4) claim for 1992, the amount of 1991 FEDE which was not deductible in 1991 for the purpose of paragraph 66(4)(a) of the Act would be $900 instead of $1,000. As a result, the CCRA's position in the 1991 Letter would be amended accordingly effective on the date of this letter and thereafter. However, see also our comments in 4 below.
Proposed Amendment to S. 66(4)
3. In the Legislative Proposals on Taxpayer Migration of December 17, 1999, Finance has proposed to change the term "may claim" under subparagraph 66(4)(b)(i) of the Act into "claims" effective for 1995 and subsequent taxation years. This change might have an impact on the determination of the deductible amount for a preceding taxation year under paragraph 66(4)(a) of the Act.
The proposed change is intended to use wording consistent with other similar provisions throughout the Act and to clarify that the amount used for the purpose of subparagraph 66(4)(b)(i) of the Act would not be a range (i.e., from 0% to 10%), but a fixed amount claimed by the taxpayer, which would not exceed 10%.
4. It is stated in the Technical Notes with respect to this proposed change as follows:
A taxpayer's minimum deduction for a taxation year under this subsection is 10% of the taxpayer's undeducted FEDE balance at the end of the year. An additional portion of a taxpayer's undeducted FEDE balance may be deducted by a taxpayer for a taxation year, essentially to the extent of the taxpayer's foreign resource income in excess of that minimum amount.
Based on the Technical Notes referring to the minimum deduction of 10%, it is arguable that this change would have no impact on our comments in 2 above regarding the interpretation of the term "deductible" in paragraph 66(4)(a) of the Act. However, given that under the proposed subsection 66(4) of the Act a taxpayer "may deduct... such amount as the taxpayer claims... ", the better view is that this change would result in whatever amount claimed (i.e., not may be claimed) by the taxpayer under paragraph 66(4)(b)(i) of the Act in a taxation year would become deductible (i.e., may be deducted) by the taxpayer under subsection 66(4) of the Act for the taxation year. In other words, whatever amount not claimed under paragraph 66(4)(b)(i) of the Act would not be considered as deductible under subsection 66(4) of the Act. Accordingly, given this proposed change, in the above-noted first example wherein the taxpayer could have claimed a deduction of $100 (i.e., he had the entitlement of such a deduction claim), but did not do so, it is our view that in determining the taxpayer's subsection 66(4) claim for Year 2, the amount of Year 1 FEDE which was not deductible in Year 1 for the purpose of paragraph 66(4)(a) of the Act would be $1,000.
This would be consistent with the CCRA's position in the 1991 Letter and would be effective for 1995 and subsequent taxation years, provided this proposed change would be enacted into the Act.
5. We note that in the Notice of Ways and Means Motion to Amend Income Tax Act of February 28, 2000, Finance has proposed further amendments to subsection 66(4) of the Act to ensure that FEDE would be deductible on a country-by-country basis. These further amendments to subsection 66(4) of the Act might have an impact on the determination of the deductible amount for a preceding taxation year under paragraph 66(4)(a) of the Act, depending on the final legislative wording of the proposed further changes.
We hope that our comments are helpful to you. These are only our general views on the matter and do not constitute an advance income tax ruling, and accordingly they are not binding on the CCRA in accordance with paragraph 22 of Information Circular IC 70-6R3 as amended.
Yours truly,
John Chan, CA
Manager
Resource Industries Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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