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.
K.H. Major (613) 995-1787
XXXX
April 27, 1984
Dear XXXX
This is in reply to your letter of March 6, 1984 in which you requested our interpretation of section 5907 of the Income Tax Regulations (the Regulations) as it applies to a foreign affiliate of a corporation resident in Canada in the following circumstances.
1. The foreign affiliate is resident in the Netherlands (i.e. the country which is listed in paragraph 5907(11)(u) of the Regula- tions) and carries on an active business in that country.
2. In order to neutralize the effect of inflation for corporate taxpayers, the Netherlands introduced a permanent system of "net wealth deductions" as of January 1, 1981. In computing its taxable income for Netherlands tax purposes, a Dutch corporate taxpayer is entitled to a deduction calculated as a certain percentage of the net wealth of the company at the beginning of the calendar year. For 1983 and subsequent years the rate is established at 4%. Not all of the components of a corporation's net wealth are included in the basis for computing this deduction. For example, shares from which the dividends will be tax-exempt under the participation exemption are excluded.
3. The Netherlands company is not required to include any "recapture" of the net wealth deduction in calculating its Dutch taxable income for any year.
We concur with your view that the amount of the net wealth deduction allowed to a foreign affiliate of a corporation resident in Canada in the circumstances as set out above would be included in the earnings amount of that foreign affiliate by virtue of the provisions of paragraph 5907(2)(f) of the Regulations.
We trust that these comments will be of assistance to you.
Yours truly,
for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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