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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: (1) Whether payments based upon "net business income", plus a minimum amount, by XXXXXXXXXX to the City of Portland, Oregon and Multnomah County, Oregon are eligible for a foreign tax credit in Canada?
(2) Are the City of Portland, Oregon and Multnomah County, Oregon a "government of a country other than Canada" for the purposes of subsection 126(2)?
Position: (1) Yes to the payments based upon "net business income". No to the minimum amount, but it is eligible as a deduction from business income pursuant to paragraph 18(1)(a). (2) Yes.
Reasons: (1) The payments based on "net business income" are an "income or profits tax". The minimum fee is not, but it is incurred for the purposes of gaining or producing income. (2) The City of Portland, Oregon and Multnomah County, Oregon are each a "political subdivision" of the United States.
XXXXXXXXXX 2002-017180
Gilles L. Gosselin
April 3, 2003
Dear XXXXXXXXXX:
Re: Foreign Tax Credits
We are writing in response to your letter dated November 1, 2002, wherein you ask whether payments by XXXXXXXXXX to: (a) the City of Portland, Oregon for the "City of Portland Business License" (CPBL); and (b) Multnomah County, Oregon for the "Multnomah County Business Income Tax" (MCBIT), are eligible for a foreign tax credit in Canada.
Description of Payments
The document that you provided to us and that you refer to as an "Information notice describing the taxes" (the "Information Notice") describes the CPBL and the MCBIT, both of which are administered by the City of Portland, Oregon, Bureau of Licenses.
The CPBL is described in the Information Notice as a business license that is required by "everyone doing business" in the City of Portland except businesses grossing less than US$25,000 per year from all sources before expenses, businesses whose only activity is regulated by the State Insurance Division, real estate sale persons whose only business activity is real estate, and individuals whose only business activity is ownership of less than 10 residential rental units. The fee for the license is 2.2% of the "net business income" with a minimum annual fee of US$100. The Information Notice also describes the fee as replacing all general business taxes in Portland, as being purely a revenue license with many features of a privilege tax, as being based on net income after expenses and not on gross receipts, unlike most city business taxes, and states that it must be paid in advance for each year of business because it is for a license to do business. In order to obtain a license, a completed one-page application form must be submitted to the Bureau of Licenses with the minimum US$100 fee. The license expires at the end of the applicant's current tax year.
The MCBIT is described as a business income tax that in 1976 replaced a business license. The tax is assessed on all "persons doing business" in Multnomah County except businesses grossing less than US$25,000 per year from all sources before expenses, businesses whose only activity is regulated by the State Insurance Division and individuals whose only business activity is ownership of less than 10 residential rental units. The tax is 1.45% of "net business income" with no minimum tax. Generally, the person must file and pay the tax within three and one half months following the end of the person's taxable year, but an extension is granted if a request is accompanied by an estimated tax payment.
The City of Portland, Bureau of Licenses has provided to us various current "Combined Report Form, Portland City Business License and Multnomah County Business Income Tax" for various reporting entities. The Report Forms all indicate that the basis for determining "net business income" for the purposes of the CPBL and the MCBIT is income reported to the State of Oregon on the respective State of Oregon tax form that is required to be filed by everyone doing business in the State. The Report Forms allow for additions and deductions from net income, such as the "Multnomah County Business Income Tax Add Back", in order to determine "Adjusted Net Income" and "Subject Net Income". The Report Forms also allow for apportionment of "net business income", for both the CPBL and the MCBIT, for business activity performed outside of the City of Portland or Multnomah County. XXXXXXXXXX.
Generally, subsection 126(2) of the Income Tax Act (Canada)(the Act) allows a taxpayer that is resident in Canada, and carries on business in a country other than Canada, to claim a foreign tax credit for "business-income tax" paid in that country, subject to certain limitations. It is always a question of fact whether a resident of Canada is carrying on business in a country other than Canada. Subsection 126(7) defines "business-income tax" as "the portion of any income or profits tax paid by the taxpayer for the year to the government of a country other than Canada that can reasonably be regarded as tax in respect of the income of the taxpayer from a business carried on by the taxpayer in the business country ... ". Paragraph 126(6)(a) states that "the government of a country other than Canada includes the government of a state, province or other political subdivision of that country; ..." If a payment is not an "income or profits tax", it is not eligible for a tax credit pursuant to subsection 126(2) of the Act, but it is deductible from the income of the business pursuant to paragraph 18(1)(a) of the Act provided it is incurred for the purpose of gaining or producing income from the business.
We have stated in Interpretation Bulletin 270R2 - February 11, 1991, Foreign Tax Credit, at paragraph 8, that in order for a foreign tax to qualify as an "income or profits tax" the basic scheme of application of the tax must be substantially similar with that of the Canadian Act and in order for the scheme to be substantially similar the foreign tax must be levied on net income or profits. As a result, the name, title or label attributed to the tax or payment to a foreign government is not the deciding factor.
Accordingly, it is our view that the payments (except for the US$100 flat fee) by XXXXXXXXXX to the City of Portland for the CPBL, and to Multnomah County, Oregon for the MCBIT, are an "income or profits tax", within the meaning of subsection 126(7) of the Act, (notwithstanding that the CPBL is referred to as a business license), because they are both determined as a percentage of "net business income" and they are paid to the government of a country other than Canada, since the City of Portland and Multnomah County are "political subdivisions" of the United States. Accordingly, the payments are eligible for the foreign tax credit in subsection 126(2) of the Act, assuming that all of the other conditions of application therein are met.
However, the US$100 minimum fee paid to the City of Portland pursuant to the CPBL is not eligible for a foreign tax credit in Canada pursuant to subsection 126(2) of the Act because it is not determined as a percentage of net business income and is therefore not an "income or profits tax". But the minimum fee is deductible from the income of the business pursuant to paragraph 18(1)(a) of the Act because it is incurred for the purpose of gaining or producing income.
Our comments are provided in accordance with the practise outlined in Information Circular 70-6R5. We trust that they are of assistance.
Yours truly,
Jane Stalker
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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