22 January 1992 Administrative Letter 9007406 F - FAPI Computation of Deductible Loss

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.

January 22, 1992

Attention: Dave Burton

Deductible Loss - Section 5903 of the Regulations to the Act

This is in response to your memorandum dated May 10, 1990 wherein you requested our opinion concerning the computation of a deductible loss under section 5903 of the Regulations to the Act (the " Regulations") for the purposes of subparagraph 95(1)(b)(v) of the Act in a particular audit case. Our understanding of the facts of the case is as follows:

24(1)

24(1)

1)     No amount is determined under any of clause 5907(1)(c)(ii)(A) or subparagraphs 5907(1)(c)(iii) and (iv) of the Regulations for the purposes of subparagraph 5903(1)(b)(i) of the Regulations in respect of a controlled foreign affiliate of an individual. Such amounts are only determined in respect of a foreign affiliate of a corporation.

2)     Even if a deductible loss had been computed for 24(1) in respect of    24(1)     under subparagraph 5903(1)(b)(i) of the Regulations, such losses would not be deductible in computing the FAPI of    24(1)     The active business losses of a foreign affiliate must generally be incurred by the affiliate in respect of the particular taxpayer claiming them.

There is no provision in the Regulations whereby such losses can be carried forward to a new shareholder when the shares of the foreign affiliate change hands in a section 85 of the Act rollover.

Corporations Versus Individuals

Subparagraph 5903(1)(b)(i) of the Regulations refers to "each amount determined under clause 5907(1)(c)(ii)(A) and subparagraphs 5907(1)(c)(iii) and (iv) in respect of an exempt loss of the affiliate" and subparagraph 5903(1)(b)(ii) of the Regulations refers to "each amount determined under clause 5907(1)(j)(ii)(A) in respect of a taxable loss of the affiliate". Since "exempt loss" and "taxable loss" are only defined (in paragraphs 5907(1)(c) and 5907(1)(j) respectively) in connection with a foreign affiliate of a corporation, no amounts would be determined under those provisions in respect of a foreign affiliate of an individual. Therefore a foreign affiliate of an individual is precluded from computing a deductible loss in respect of its active business losses.

Subsection 5907(1) of the Regulations is a series of defined terms which are specifically designed to permit a corporation to compute the surplus pots of its foreign affiliate. As is evidenced by the fact that subsection 5900(3) of the Regulations had to be put in place to order permit individuals a deduction in respect of certain dividends that would otherwise only be available  to corporations (because only corporations can receive dividends that are prescribed to have been paid out of the taxable surplus of foreign affiliates), subsection 5907(1) of the Regulations was never intended to apply to foreign affiliates of individuals.

In computing the portion of a deductible loss of a foreign affiliate of a corporation that arose from its active business activities, it is necessary to work through a number of the definitions in subsection 5907(1) of the Regulations. The most rudimentary of these is in paragraph 5907(1)(e) of the Regulations. It defines the term "loss" of a foreign affiliate of a taxpayer resident in Canada for a taxation year from an active business carried on by it in a country and is the only term defined that is not specifically in respect of a foreign affiliate of a corporation. Once the "loss" is computed, one may proceed to determine the "net loss" of a foreign affiliate for a taxation year from an active business carried on in a country. This term, like "exempt loss" and "taxable loss" is defined in reference to a foreign affiliate of a corporation.

If it was intended that an individual be permitted a deductible loss in respect of the active business losses of its foreign affiliate in computing the FAPI of that foreign affiliate, the references to subsection 5907(1) of the Regulations in paragraph 5903(1)(b) of the Regulations could have been to paragraph (e) rather than paragraphs (c) and (j) of subsection 5907(1) of the Regulations. Accordingly, it is our view that it is not implied that the technical result was not intended.

Furthermore, it is our view the Regulations are sufficiently explicit in denying an individual a deductible loss in respect of the active business losses of a foreign affiliate of an individual that the proposition that where a statute is unclear it should be interpreted in favour of the taxpayer, which is supported by the Johns-Manville Canada Inc. v. The Queen, 85 DTC 5373 (S.C.C.) case and some others, would not apply here.

Transfer of Ownership

In order to define an "exempt loss" or a "taxable loss" of a foreign affiliate (i.e. for the purposes of paragraph 5903(1)(b) of the Regulations), one must first compute the "net loss" of the foreign affiliate. The term "net loss" is defined in respect "of a foreign affiliate of a corporation for a taxation year of the affiliate". In our view this reference to "the affiliate" is to the foreign affiliate of the particular Canadian corporation. Therefore, only losses incurred during taxation years during which the foreign corporation was a foreign affiliate of that particular corporation can be "net losses for a taxation year of the affiliate" and be included in computing a deductible loss of a foreign affiliate in respect of that corporation.

If the intent was to include earlier losses, one would have expected to see wording in paragraph 5903(1)(b) similar to that found in 5903(1)(a) of the Regulations where certain amounts are also included in the deductible loss of a foreign affiliate of a taxpayer if they arose while the foreign corporation was a foreign affiliate "of a person described in any of subparagraphs 95(2)(f)(iv) to (vii) of the Act".

Conclusion

We recommend that you reassess     24(1)    to deny any deduction under subparagraph 95(1)(b)(v) of the Act in respect of active business losses incurred by    24(1)    while it was a controlled foreign affiliate of      19(1) 

for DirectorReorganizations and Foreign DivisionLegislative and Intergovernmental Affairs Branch