16 July 2013 Internal T.I. 2013-0481151I7 - Application of 152(4)(b)(iv) and 110.5

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: 1. Whether subparagraph 152(4)(b)(iv) provides that the Minister may make a reassessment beyond the normal reassessment period where a taxpayer has requested an adjustment to include an amount in income under section 110.5 and a foreign tax credit provide under subsection 126(1) or 126(2). 2. Whether an addition to income under section 110.5 is a permissive amount in the context of IC84-1.

Position: 1. Yes. 2. Yes.

Reasons: 1. The provisions of 152(4)(b)(iv) allow for a reassessment beyond the normal reassessment period where the reassessment is a consequence of a payment or reimbursement of income or profits tax to or by the government of a country other than Canada. Subsections 126(1) or (2) permit a taxpayer to claim a foreign tax credit when the credit is equal to the lesser of the foreign tax paid on the foreign source income and the Canadian tax that would otherwise be payable on that income. In certain situations, section 110.5 permits a corporation to increase taxable income in order to claim a foreign tax credit provided by subsection 126(1) or (2). An adjustment which involves by necessity both section 110.5 and subsection 126(1) or 126(2) would be a reassessment made as a consequence of a payment or reimbursement of income tax to the government of a country other than Canada and subparagraph 152(4)(b)(iv) is applicable. 2. The taxpayer may choose to add an amount to income under section 110.5, and therefore the amount is permissive. However, if the adjustment under 110.5 changes provincial tax payable, the adjustment would not meet the criteria in IC84-1, and would not be permitted beyond the extension of the normal reassessment period provided for in subparagraph 152(4)(b)(iv).

July 16, 2013

Large File Case HEADQUARTERS
Toronto Tax Service Office Income Tax Rulings
Directorate
Attention: Gordon A. MacGibbon Gillian Godson

2013-048115

Application of Subparagraph 152(4)(b)(iv)

We are writing in reply to your email of March 8, 2013, requesting our views on the application of subparagraph 152(4)(b)(iv) of the Income Tax Act (the "Act").

In particular, you have requested clarification of our views expressed in our letter dated December 9, 2010 (file number 2010-037980). In that letter, we stated that subparagraph 152(4)(b)(iv) of the Act does not permit the Minister to make a reassessment beyond the normal reassessment period where a taxpayer has requested an adjustment to include an amount in income under section 110.5 and to claim a foreign tax credit provided under subsection 126(1) or 126(2).

In addition, you have requested clarification of our comments in our previous letter on whether an addition to income under section 110.5 of the Act is a permissive amount in the context of Information Circular IC84-1, Revisions of Capital Cost Allowance Claims & Other Permissive Deductions.

Our Comments

Generally, subsections 126(1) or (2) of the Act permit a taxpayer to claim a foreign tax credit for amounts they have paid in respect of foreign tax. The foreign tax credit is equal to the lesser of the foreign tax paid on the taxpayer's foreign source income and the Canadian tax that would otherwise be payable on that income.

Section 110.5 of the Act was enacted to address certain situations where a corporation would not otherwise be able to fully utilize the foreign tax credit. The provisions of section 110.5 allow a corporation to add an amount in computing its taxable income to the extent that this causes an increase to any amount deductible by the corporation as a foreign tax credit under subsection 126(1) or (2), but does not cause any increase to an amount deductible by the corporation in a provision set out in paragraph 110.5(b). The amount added under section 110.5 in computing the corporation's taxable income is also added in calculating its non-capital loss for the year, which may be carried over to and used in other tax years. Therefore, section 110.5 provides a corporation with the option of generating a foreign tax credit in respect of foreign taxes that might otherwise expire and effectively convert them into a non-capital loss that could be used in another taxation year.

In general terms, the provisions of subsection 152(4) of the Act provide that the Minister may not reassess tax payable for a taxpayer after the normal reassessment period unless certain conditions described in subsection 152(4) are met. In particular, subparagraph 152(4)(b)(iv) of the Act permits the Minister to assess, reassess or make an additional assessment of tax within three years after the end of the normal reassessment period provided that the assessment is made "as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada". Therefore, where the taxpayer has tax payable to which a foreign tax credit can be applied, a reassessment to claim the foreign tax credit provided by section 126 of the Act would be considered to be a reassessment made as a consequence of the foreign tax paid. As a result, the provisions of 152(4)(b)(iv) would apply to extend the normal reassessment period.

With respect to the issue of whether subparagraph 152(4)(b)(iv) would allow an assessment to be issued beyond the normal reassessment period where the assessment is a result of adjustments under both section 110.5 and section 126, it is no longer our view that the provisions of 152(4)(b)(iv) would not be applicable. As noted above, the purpose of section 110.5 is to allow a taxpayer to claim a foreign tax credit in situations where they would not otherwise be able to fully utilize the foreign income or profits taxes that were paid. Therefore, there is a causal connection between the foreign tax paid and the adjustment to claim the foreign tax credit, regardless of whether the adjustment includes an addition to income under the provisions of section 110.5. Accordingly, a reassessment, which is by necessity a result of the provisions of both section 110.5 and subsection 126(1) or 126(2), would be a reassessment made as a consequence of a payment or reimbursement of income tax to the government of a country other than Canada, and subparagraph 152(4)(b)(iv) is applicable.

Finally, you have asked for our views on whether an addition to income under section 110.5 would be considered a permissive amount and, as a result, whether the Minister may allow an adjustment to this amount beyond the extension of the normal reassessment period provided for in subparagraph 152(4)(b)(iv). We agree with your view that the taxpayer may choose to add an amount to income under section 110.5 and, therefore, the amount may be considered a permissive amount. However, paragraph 10 of IC84-1 provides that the Minister may allow adjustments to permissive amounts in years that are statue-barred where there is no change in the tax payable for the year. As noted in our previous letter, in a situation where an adjustment under section 110.5 increases provincial tax payable, the adjustment would not satisfy the criteria for the Minister to accept a request for a revision to a permissive amount. Therefore, in such a situation, the adjustment would not be permitted beyond the extension of the normal reassessment period provided for in subparagraph 152(4)(b)(iv). Nevertheless, requests for adjustments with respect to IC84-1 are determined on a case-by-case basis by the relevant Tax Service Office.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch