25 August 1983 Income Tax Severed Letter 3086-1 - Meaning of “the period for which the accounts of the foreign affiliate have been ordinarily made up” in paragraph 95(1)(g)

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.

Subject:

What is meant by “the period for which the accounts of the foreign affiliate have been ordinarily made up” in the definition of “taxation year” in paragraph 95(1)(g) of the Act.

Problem:

The affiliate in question was resident in Australia and followed the normal practice in that country of filing its corporate income tax returns with unaudited statements for years ended June 30. The annual audited financial statements for purposes of reporting to its shareholders were for fiscal years ending December 31. The Canadian parent (Canco) had a taxation year ending December 31 FAPI arose in the June to December period and the foreign affiliate ceased to be a controlled foreign affiliate in the subsequent January to June period. Under subsection 91(1), FAPI could only be included in Canco's income if the foreign affiliate was controlled at the end of the foreign affiliate's taxation year. Therefore, if December 31 was the end of the foreign affiliates “taxation year” pursuant to the definition in paragraph 95(1)(g), the FAPI could be taxed whereas it could not otherwise be taxed since the affiliate was not controlled by Canco on June 30 of the subsequent period.

Position:

The date of reporting to the shareholders was regarded as the period for which the “accounts of the foreign affiliate have been ordinarily made up” and not the date for income tax return purposes in the foreign jurisdiction.

Some reasons are as follows:

• (1) By way of contrast, in Canada, the definition of taxation year in paragraph 249(1)(a) of a corporation is its fiscal period which is defined in subsection 248(1). That definition specifically refers to the period for which the accounts have ordinarily been made up and accepted for purposes of assessment under the Act. Acceptance for assessment under the foreign jurisdiction is not a requirement in the definition of taxation year in paragraph 95(1)(g). Therefore the audited financial statements issued pursuant to the corporate statutes of the foreign jurisdiction is to be regarded as the appropriate period.
• (2) Information Circular 77-9R dated June 22, 1983 (Books, records, etc. for foreign affiliates) states the following in the last sentence of paragraph 6(d):
• “What would ordinarily be expected to be available would be the financial statements and other information that the Canadian taxpayer of a foreign affiliate is entitled to receive in its right as a shareholder under the corporate or other statutes of the foreign jurisdiction.” (Emphasis added)
• It is quite probable that a shareholder may not in some jurisdictions be entitled to the financial statements filed in connection with an income tax return.
• (3) While there is an argument that the accounts are also ordinarily made up as of June 30 for income tax purposes, they may also ordinarily be made up monthly, quarterly, for some other reason(s) (internal use for budgeting, quarterly interest payment to creditors, use by government agencies other than the tax authorities etc.). It seems undesirable to (in effect) leave the choice of year end “open” until there is a FAPI consequence.