20 June 2003 External T.I. 2003-0018905 - Foreign Tax Credits Income/Profits Tax

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: Whether the State of New Jersey Corporate Business Tax (NJCBT) paid by XXXXXXXXXX is an "income or profits tax" that is eligible for a foreign tax credit in Canada?

Position: Yes

Reasons: The payments are based on net income

XXXXXXXXXX 								2003-001890
	Gilles L. Gosselin
June 20, 2003

Dear XXXXXXXXXX:

Re: Foreign Tax Credits

We are writing in response to your letter dated May 15, 2003, wherein you ask whether the State of New Jersey Corporate Business Tax (NJCBT) paid by XXXXXXXXXX (e.g., Canadian XXXXXXXXXX companies) is eligible for a foreign tax credit in Canada.

XXXXXXXXXX of XXXXXXXXXX provided us with a memorandum prepared by XXXXXXXXXX that explains how the NJCBT operates. We have also obtained from the State of New Jersey website the "2002 CBT-100 New Jersey Corporation Business Tax Return" and the completion instructions.

From our review of your letter and these documents we understand that:

1. The State of New Jersey applies the NJCBT to all foreign companies that "do business" in the State;

2. The State is applying the NJCBT to Canadian XXXXXXXXXX companies because XXXXXXXXXX;

3. The State does not have a XXXXXXXXXX;

4. The State does not consider that XXXXXXXXXX;

5. Generally, the State requires that Canadian XXXXXXXXXX companies include in income, for the purposes of determining the NJCBT, their entire net income (e.g., income inside and outside of the U.S.), which includes the income from XXXXXXXXXX (e.g., gross receipts or sales less cost of goods sold) in the State that is treaty exempt for federal tax purposes in the U.S., pursuant to XXXXXXXXXX of the Canada - U.S. Tax Convention;

6. Generally, the State determines the portion of the entire net income that is income in the State ("Allocated Net Income") by multiplying the entire net income by an allocation factor that takes into account: (i) the value of real and tangible personal property in the State; (ii) receipts from all sales, services, rentals, royalties and other business transactions in the State; and (iii) wages, salaries and other personal service compensation in the State;

7. Generally, the State determines the NJCBT by multiplying the Allocated Net Income by 7.5% if the entire net income is less than US$100,000 and by 9.0% if the entire net income is greater than US$100,000; and

8. For tax periods beginning before January 1, 2002, the State applies a minimum tax of US$200.

Our Comments

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 ... ". 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 if 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 (which is currently being revised), at paragraph 8, that in order for a foreign tax to qualify as an "income or profits tax" the basis of taxation 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.

Accordingly, it is our view that the NJCBT paid by Canadian XXXXXXXXXX companies is an "income or profits tax", within the meaning of subsection 126(7) of the Act, because it is determined as a percentage of Allocated Net Income. As a result, 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$200 minimum tax paid to the State of New Jersey pursuant to the NJCBT 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 income and is therefore not an "income or profits tax". But the minimum fee is deductible from income 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