18 May 1993 Income Tax Severed Letter 9302715 - N.Y. State Franchise Tax—Income and Profits Tax?

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

XXXXXXXXXX                                        930271
                                                  D. Patrick
                                                  (613) 957-2125

Attention: XXXXXXXXXX

May 18, 1993

Dear Sirs:

Re: New York Franchise Tax

This is further to your letter concerning whether The New York Corporate Franchise Tax (the "Franchise Tax") is an "income or profits tax" for purposes of paragraph 126(7)(a) of the Income Tax Act (Canada) (the "Act").

You have asked us to assume that a Canadian taxpayer is liable for Taxes pursuant to this legislation based on its "entire net income" (which is a defined term under the legislation) and that this amount approximates its income determined in accordance with generally accepted accounting principles.

As indicated in your correspondence, the Franchise Tax you are specifically concerned with is imposed pursuant to Article 9-A of the Tax Law (New York)

We also note that the commentary provided on this Article indicates that

The Corporate franchise tax is generally based on net income and/or capital. Most corporations are taxed on a net income basis...

The commentary goes on to state that;

The tax consists of the sum of .09% of subsidiary capital allocated to New York (if any), plus the greater of the following,

* 1. 9% of net income... 2. .178%...of the corporation's capital allocated to New York... 3. 5% of minimum taxable income allocated to New York 4. a fixed dollar minimum tax

Our Comments

We agree that a modern interpretative approach to the Act rejects strict construction as no longer being appropriate. We further agree that regard should be had to the true commercial and practical nature of transactions, and further that a common sense appreciation is to be had for all the guiding features of the events in question. While it is your view that based on these principles, the taxes are in substance an "income tax", in our view the tax is in part a "income tax", and in part a tax imposed on capital. We note the legislation also provides for a minimum tax to be paid irrespective of profits in the jurisdiction.

It is our view the portion of the tax paid, which relates to "net income", (shown with an * asterisk above) would be considered as an income or profits tax paid to a government other than Canada. However, when such tax is based on capital, or on a minimum tax liability, it would not be considered as a business-income tax for the purposes of paragraph 126 (7)(a) of the Act.

It is our understanding that the legislation also provides a different basis and structure for taxing other special types of corporate activities, (i.e. transportation and transmission corporations, agricultural cooperatives, utility companies, banks and insurance corporations). While we have not reviewed the legislation in detail with respect to the above listed specific types of business activities, it is our perception that the basis of taxation is significantly different than shown above, and for these reasons we will not comment on the applicability of any such taxes being considered to be "income and profits" taxes for the purposes of paragraph 126(7)(a) of the Act.

When non-refundable taxes are imposed under this legislation which are not considered to be "Income and Profits" taxes from a business carried on by the taxpayer pursuant to paragraph 126(7)(a), they would still be deductible in the computation of taxable income pursuant to section 18 (1)(a) of the Income Tax Act.

Yours truly, for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch