3 December 2002 External T.I. 2002-0174105 - Taxation Year 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 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) Will CCRA confirm that section 250.1 does not cause subsection 249(4) to apply to the acquisition of control of foreign affiliates? (2) Does CCRA believe that any previous technical positions or assessing practices in respect of the determination of a foreign affiliate's taxation year are affected by the introduction of section 250.1?

Position: (1) Confirmed. (2) While the taxation year of a foreign affiliate has to be determined based on the circumstances of each case, our general position is that taxation year of a foreign affiliate for purposes of computing the foreign affiliate's foreign accrual property income and surplus accounts should be determined generally in accordance with the taxation year that the foreign affiliate uses for purposes of tax reporting in the country in which the affiliate is resident. We do not believe that this general position is affected by paragraph 250.1(a).

Reasons: The "unless the context requires otherwise" exception in paragraph 250.1(a) applies.

Tax Executives Institute Liaison Meeting, December 3, 2002 - CCRA's Response to Question 17

Question 17 - Taxation Year of a Foreign Affiliate

In general, the earnings of a foreign affiliate for the taxation year in which it is acquired are included in exempt or taxable surplus as the case may be. On the other hand, the earnings for the taxation year in which a foreign affiliate is sold are generally not included in either exempt or taxable surplus.

Subsection 249(4) provides that at any time control of a corporation is acquired, a new taxation year of the corporation is deemed to commence at the time of the change in control. In 1994, subsection 249(4) was amended in respect of acquisitions of control occurring after July 13, 1990, to clarify that subsection 249(4) does not apply to the acquisition of control of a foreign affiliate, provided the foreign affiliate did not carry on a business in Canada in the year in which the acquisition occurred. In 2001, section 250.1 was introduced to clarify that the taxation year of a non-resident person is determined in the same manner as the taxation year of a person resident in Canada, unless the context requires otherwise. Section 250.1 is applicable after December 17, 1999. Will CCRA confirm that section 250.1 does not cause subsection 249(4) to apply to the acquisition of control of foreign affiliates? Does CCRA believe that any previous technical positions or assessing practices in respect of the determination of a foreign affiliate's taxation year are affected by the introduction of section 250.1?

CCRA's Response

Paragraph 250.1(a), introduced in 2001, provides that for greater certainty, unless the context requires otherwise, a taxation year of a non-resident person shall be determined, except as otherwise permitted by the Minister, in the same manner as the taxation year of a person resident in Canada. Since the preamble to subsection 249(4) expressly provides that the deeming rules contained in that subsection do not apply to a corporation that is a foreign affiliate of a taxpayer resident in Canada and that did not carry on a business in Canada at any time in the year in which the acquisition of control occurred, the context would require that the taxation year of such a foreign affiliate be determined without regard to subsection 249(4). In other words, this is a case that would fall within the "unless the context requires otherwise" exception in paragraph 250.1(a). Accordingly, we confirm that section 250.1 does not cause subsection 249(4) to apply to the acquisition of control of foreign affiliates that did not carry on business in Canada at any time in the year in which the acquisition occurred.

While the taxation year of a foreign affiliate has to be determined based on the circumstances of each case, we would like to point you to subsection 95(1) which defines a taxation year in relation to a foreign affiliate of a taxpayer for purposes of the foreign affiliate rules (that is, subdivision i of Division B of Part I of the Act) to mean the period for which the accounts of the foreign affiliate have been ordinarily made up, but no period may exceed 53 weeks. In the past, we have taken the position that the context of the foreign affiliate rules in subdivision i of Division B of Part I of the Act and Part LIX of the Regulations requires that the taxation year of a foreign affiliate for purposes of computing the foreign affiliate's foreign accrual property income and surplus accounts be determined generally in accordance with the taxation year that the foreign affiliate uses for purposes of tax reporting in the country in which the affiliate is resident (subject to the exception where the foreign affiliate carries on business in Canada at any time in the year in which its control is acquired, in which case subsection 249(4) would apply). We do not believe that this general position is affected by paragraph 250.1(a) since it would fall within the "unless the context requires otherwise" exception in paragraph 250.1(a).

Presenter: Jim Wilson
Prepared by: Sabrina Wong
Phone number: 957-9231
Division: Income Tax Rulings Directorate