24 August 1989 Income Tax Severed Letter 5-7674 - Computation of foreign accrual property income

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.

Dear Sirs:

This is in reply to your letter of March 3, 1989. Your letter describes a hypothetical situation where a taxpayer wishes to make an investment in a foreign limited partnership which in turn will invest in foreign oil and gas, exploration and development.

In your view, direct investment is unattractive from a Canadian tax viewpoint because the taxpayer may not benefit fully from deductions available under subsection 66(4) of the Income Tax Act (the "Act") because of problems associated with the matching of Canadian and foreign income and therefore the foreign tax credit. However, structuring the investment through a controlled foreign corporation would not improve the result from the taxpayer's perspective if the income proves to be FAPI, because in calculating the amount to be included in income under subsection 91(1) of the Act, no deduction is available under subsection 66(4) of the Act because the affiliate is not resident in Canada. In your view this result represents an anomaly in the legislation and was not intended.

We concur with your interpretation and will bring this matter to the attention of our Current Amendments Division for their consideration. However, we can make the following observations concerning the hypothetical situations you have described.

Where the investment in foreign partnership units is made directly by an individual resident in Canada and the tax paid in a foreign jurisdiction in a year exceeds the foreign tax credit available under subsection 126(1) of the Act, a deduction may be made under subsection 20(11) and/or 20(12) of the Act if the taxes are paid on income from property. If the foreign taxes are paid in respect of foreign business income, paragraph 126(2)(a) of the Act provides for a 7 year carry forward of any unused foreign tax credits.

Where the investment is made through a controlled foreign affiliate of the taxpayer, we would question whether the taxpayer would be in a better position even if a deduction under subsection 66(4) of the Act were available for the purposes of calculating FAPI. In our view there would be some doubt whether the full amount of the taxes paid by the foreign affiliate to a foreign jurisdiction in a year in which an amount has been deducted under subsection 66(4) of the Act in determining its FAPI, would meet the definition of a "foreign accrual tax" for the purposes of paragraph 95(1)(c) of the Act. Where the computation of FAPI for the purpose of subsection 91(1) of the Act includes an amount deducted under subsection 66(4) of the Act and there is no similar deduction available in the foreign jurisdiction, taxable income determined in the foreign jurisdiction will exceed FAPI. Accordingly, there may be some question whether the foreign tax paid on the excess could be considered applicable to any amount included in computing a taxpayer's income" for the purposes of paragraph 95(1)(c) of the Act.

We hope that you will find our comments of some assistance.