3 October 2000 External T.I. 2000-0015565 - Immigration of a foreign affiliate

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: Whether, on the immigration of a foreign affiliate, the amount to be added to taxable surplus arising from the deemed disposition of excluded property under paragraph 128.1(1)(b), and included in Fapi pursuant to Regulation 5907(13)(a), takes into account the hypothetical tax that would have been paid if there had been an actual disposition?

Position: No

Reasons: Although paragraph 128.1(1)(b) may deem certain dispositions to have occurred, generally no income or profits tax would actually have been paid by the affiliate in respect of such deemed dispositions. Income or profits tax must be paid before it can be recognized as "underlying foreign tax". In our view, such a result is inconsistent with the purpose of the provision, especially in light of the fact that amount A of paragraph 5907(13)(b) specifically accounts for the notional tax for dispositions deemed by paragraph 128.1(1)(b). The Department of Finance is aware of this anomaly and is considering a relieving amendment.

XXXXXXXXXX  	1999-001556
		Tim Kuss
Attention: XXXXXXXXXX 

October 3, 2000

Dear Sirs:

Re: Immigration of a Foreign Affiliate

This is in reply to your letter dated December 23, 1999 requesting our opinion on the proper method of calculating the prescribed amount to be included in a foreign affiliate's foreign accrual property income ("FAPI") pursuant to subparagraph 128.1(1)(d)(ii) where a foreign affiliate continues into Canada in accordance with applicable corporate law.

Specifically, you have asked whether the amount to be added to the taxable surplus of the foreign affiliate arising from the deemed disposition of its excluded property under paragraph 128.1(1)(b), and included in deemed FAPI of the affiliate pursuant to Regulation 5907(13)(a) takes into account the hypothetical tax that would have been paid if there had been an actual disposition.

In addition, with respect to the computation of A in paragraph 5907(13)(b) of the Regulations, you have asked how to determine the amount that would have been included in the underlying foreign tax of the affiliate if each disposition deemed by paragraph 128.1(1)(b) of the Act had been an actual disposition and, more particularly, how the notional tax in respect of such dispositions would be allocated between exempt and taxable earnings.

We provide the following comments.

Pursuant to the definition of "underlying foreign tax" in subsection 5907(1) of the Regulations, amount A(ii) thereof is "the portion of any income or profits tax paid to the government of a country by the subject affiliate that can reasonably be regarded as having been paid in respect of the taxable earnings of the affiliate ...". Although paragraph 128.1(1)(b) may deem certain dispositions to have occurred, generally no income or profits tax would actually have been paid by the affiliate in respect of such deemed dispositions. As a result, no amount of notional tax (in respect of such deemed dispositions) would be included in the "underlying foreign tax" of the affiliate and hence would not be reflected in the "taxable earnings" or "taxable surplus" of the affiliate for purposes of paragraph 5907(13)(a) of the Regulations.

In our view, such a result is inconsistent with the purpose of the provision, especially in light of the fact amount A of paragraph 5907(13)(b) of the Regulations specifically accounts for the notional tax for dispositions deemed by paragraph 128.1(1)(b) of the Act.

It is our understanding that the Department of Finance is aware of the above anomaly and is considering a relieving amendment that would be retroactive to the coming into force of the current Regulation. You should contact the Department of Finance in this regard.

Regarding the computation of "underlying foreign tax", our response to question 12 of the Round Table at the 1988 Canadian Tax Foundation Conference is still an accurate reflection of our views. These same principles should be followed in determining amount A in paragraph 5907(13)(b) of the Regulations.

We hope our comments are of assistance.

Yours truly,

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