2 March 1983 Income Tax Severed Letter 93031-3 F

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.

RE: Paragraph 95(1)(c) and Regualtion 5907

Subject:

Calculation of foreign accrual tax, net earnings, exempt surplus, taxable surplus and underlying foreign tax.

Problem:

How do we determine the tax applicable to a particular foreign affiliate where that foreign affiliate is a member of a group filing a consolidated return in the United States and a) the total tax payable is reduced by a loss of at least one member of the group, and b) a member is reimbursed by another member for the use of its loss. Also, where consolidated returns are not filed but one company reimburses another for the use of its loss how do we treat the payment and receipt.

Position:

Where consolidated returns are filed we take the position that:

a) a principal-agency relationship exists between the member responsible for filing returns and remitting the tax for the group and the other members of the group; b) only the pro-rata share of the total tax paid by the group qualifies as an income or profits tax of each member of the group to the extent paid by that member; and c) where there is compensation within the group for the benefit derived from another members loss both the payment, and receipt are regarded as on account of capital and do not qualify as an income or profits tax.

Where consolidated returns are not filed and there is a reimbursement for loss utilization it is treated as in c) above.

Comments:

Payments or receipts dealt with herein that do not qualify as an income or profits tax are on account of capital and do not affect the surplus accounts but could be subject to paragraph 53(1)(c) in appropriate circumstances.

The foregoing position applies to the United States only. There may be other relevant considerations where consolidated returns are filed in other jurisdictions - particularly the United Kingdom. The position taken herein applies only prior to 1982 taxation years whereafter the provisions of Regulation 5907(1.1) to (1.3) will apply.