15 March 2004 External T.I. 2003-0022651E5 - Canada-Mexico Income Tax Convention - Assets 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.

Principal Issues: Whether assets tax under the Assets Tax Law is an "income or profits tax" for purposes of the Foreign Tax Credit?

Position: No

Reasons: Assets Tax liability is not computed by reference to income.

XXXXXXXXXX 2003-002265

March 15, 2004

Dear XXXXXXXXXX:

Re: Canada-Mexico Income Tax Convention

This is in reply to your letter of June 3, 2003, wherein you requested clarification with respect to the above-noted subject. More particularly, you ask whether the Mexican assets tax levied on an individual resident in Canada is an "income or profits tax" for the purposes of section 126 of the Income Tax Act (Canada) (the " Act ")?

Your comments

You referred us to paragraph 8 of Interpretation Bulletin IT-270R2 - February 11, 1991 - Foreign Tax Credit which states: "...a tax that is specifically identified as being subject to the provisions of a comprehensive income tax treaty between Canada and a particular country automatically qualifies as an income or profits tax ... ".

You point out that under the Canada-Mexico Income Tax Convention (the "Convention"), "Mexican tax" is defined as including the assets tax under the Assets Tax Law (the "ATL") and that " tax ", in the case of Mexico, is defined as Mexican tax. You also note that Article 22(1) of the Convention allows a tax credit for "tax payable in Mexico on profits, income or gains arising in Mexico", but subject to the existing provisions of the law of Canada. You therefore question whether the context of Article 22(1) requires us to read the word "tax" as "Mexican tax", thus including the assets tax.

Our comments

You said in your letter that the assets tax under the ATL is levied annually at the rate of 1.8% on all business property, commencing after four years of business operations. Thus, it is essentially a capital tax. It serves as a minimum tax since a taxpayer will not be liable for the assets tax as long as the taxpayer's income tax liability exceeds the taxpayer's assets tax liability. We also understand that under the ATL, residents of foreign countries are taxed on the yearly average net value of certain assets generally attributable to Mexican businesses, and that a taxpayer can, under the ATL, credit against its assets tax liability for a year the amount of its income tax liability for the year or the next five years.

In our view, the assets tax is not an "income or profits tax", within the meaning of subsection 126(7) of the Act, because it is determined as a percentage of the net value of certain assets of the taxpayer. The assets tax is not a tax payable in Mexico on profits, income or gains, for purposes of the Convention. Moreover, Article 22 of the Convention does not specifically require Canada to give relief for the assets tax under the ATL. As you pointed out, paragraph 1 of Article 22 of the Convention requires only that tax payable in Mexico on profits, income or gains arising in Mexico shall be deducted from any Canadian tax payable in respect of such profits, income or gains. The comment in paragraph 8 of IT-270R2 that you referred us to regarding specifically identified taxes in a tax treaty was a reference to particular taxes imposed by a foreign country as identified in an "elimination of double tax" article. See for example, the U.S. taxes referred to in paragraph 2(a) of Article XXIV of the Canada-United States Income Tax Convention (1980), as amended by the third protocol to that convention. IT-270R2 is currently under review and it is anticipated that this point will be clarified in the revised version.

We trust the above comments are of assistance.

Yours truly,

Alain Godin
for Director
International and trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch