9 March 2004 External T.I. 2003-0025091E5 - Deductible loss 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.

Principal Issues: Whether draft paragraph 5903(3)(b) would permit a property loss incurred by a foreign affiliate of a successor of the taxpayer to be carried back and claimed as a deductible loss of a foreign affiliate of the taxpayer.

Position: No

Reasons: A successor of the taxpayer is not a person described in subparagraphs 95(2)(f)(iv)-(vii).

XXXXXXXXXX 								2003-002509

March 9, 2004

Dear XXXXXXXXXX:

Re: Deductible Loss of a Foreign Affiliate

This is in response to your e-mail of June 19, 2003 wherein you request our view whether draft paragraph 5903(3)(b) of the Income Tax Regulations (the "Regulations") introduced by the Department of Finance March 16, 2001 will apply to permit a taxpayer to claim a deductible loss in the following circumstances:

1) New Parent ("NP") is a taxable Canadian corporation that was formed in 2001 as a result of vertical amalgamation of Old Parent ("OP") another taxable Canadian corporation and its wholly owned subsidiary ("S") resident in Canada. Each of NP, OP and S has a December 31 taxation year-end.

2) In its 2000 taxation year, OP owned 100% of the shares of a corporation resident in Barbados ("CFA"). CFA's taxation year also ends on December 31.

3) CFA earned foreign accrual property income ("FAPI") of $1 million in its taxation year ended December 31, 2000 and this $1 million was included in computing the income of OP in accordance with section 91 of the Income Tax Act (the "Act).

4) CFA incurred a foreign accrual property loss ("FAPL") of $1 million in its taxation year ended December 31, 2002

You request our view whether in the above circumstances, the $1 million FAPL in incurred by CFA in its taxation year ended December 31, 2002 could be claimed by OP as CFA's deductible loss in the description of "F" in the definition of FAPI in subsection 95(1) of the Income Tax Act (the "Act") for its taxation year ended December 31, 2000 pursuant to draft section 5903 of the Regulations.

Our Comments

The FAPI and the FAPL of a foreign affiliate of a taxpayer are amounts that are computed in reference to a particular taxpayer. As OP and NP are two different taxpayers, absent a specific provision that provides otherwise, a loss from property incurred by a foreign corporation in a taxation year in which it was not a foreign affiliate of a taxpayer would have no relevance to the computation of the FAPI of the same corporation in a taxation year in which it was a foreign affiliate of that taxpayer. This conclusion is in accordance with the Federal Court of Appeal decision in The Queen v. Pan Ocean Ltd 94 DTC 6412 wherein it was decided that an amalgated corporation is treated as a new corporation for certain purposes including the computation of income for purposes of the Act by the effect of paragraph 87(2)(a) thereof.

Draft paragraph 5903(3)(b) of the Regulations is a special rule that permits the FAPL of a foreign affiliate for a taxation year where it was not a controlled foreign affiliate of the particular taxpayer but was a controlled foreign affiliate of a person described in subparagraphs 95(2)(f)(iv) to (vii) of the Act to be included in the deductible loss of the foreign corporation in a taxation year when it was a foreign affiliate of the particular taxpayer. However, it is our view that in the above hypothetical scenario NP would not be person described in subparagraphs 95(2)(f)(iv) to (vii) of the Act in reference to OP. Accordingly, OP could not claim the FAPL incurred by CFA in its taxation year ended December 31, 2002 in computing the deductible loss of CFA under draft section 5903 of the Regulations for the purposes of the description of "F" in the definition of FAPI in subsection 95(1) of the Act in its taxation year ended December 31, 2000.

We hope the above is of assistance to you.

Yours truly,

Olli Laurikainen
Manager
International Section II
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch