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.
Corporate Management Tax Conference
Foreign Tax Credit - U.S. Branch Level Interest Tax
Question Under subsection 882(c) of the Internal Revenue Code (the "IRC"), a Canadian company which operates a branch in the U.S. is allowed a deduction for interest expense incurred in computing the income of the branch for U.S. income tax purposes on an apportionment formula basis.
As a result, the branch may be able to deduct interest expenses for U.S. tax purposes in excess of the interest actually paid by it and recorded on its books. To the extent that the interest allowed in computing the income of the branch exceeds the interest paid by the branch and recorded on its books, the Canadian company is subject to a special tax called the branch level interest tax ("BLIT") on the excess interest as if the branch were a separate corporation which paid the excess interest to the Canadian company (i.e. a foreign corporation).
The BLIT is provided for in subparagraph 884(f)(1)(B) of the IRC. In effect, the U.S. allows a deduction for the excess interest and treats the excess as a deemed interest payment which is subject to the BLIT.
(a) Would Revenue Canada confirm that the BLIT imposed under subparagraph 884(f)(1)(B) of the IRC is considered to be a "business-income tax" as defined in paragraph 126(7)(a) of the Income Tax Act (the "Act") or a "non-business-income tax" as defined in paragraph 126(7)(c) of the Act?
(b) If the BLIT does not qualify as a "business-income tax" or a "non- business-income tax" as defined in paragraph 126(7)(a) or (c) of the Act, respectively, is it deductible in computing business income for Canadian income tax purposes?
Department's Position
(a) No. The BLIT is not an "income or profits tax" for the purposes of paragraphs 126(7)(a) or (c) of the Act for the simple reason that the BLIT is not imposed on the branch's income or profits.
(b) Yes. The BLIT is considered to be a deductible expense under paragraph 18(1)(a) of the Act on the basis that it is an outlay incurred for the purposes of gaining or producing business income. The BLIT also reduces the U.S. foreign business income for the purposes of calculating any foreign tax credits under section 126 of the Act.
Prepared by G. Middleton
May 31, 1993
File #5-931571
Doc. Type "9"
Applicable Sections: Subsection 126(7) and paragraph 18(1)(a)
Subject: U.S. Branch Level Interest Tax and Foreign Tax Credits
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