27 September 1993 External T.I. 9324235 F - Immigration of Foreign Affiliate

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Technical Interpretation Request

This is in response to your request for our interpretations in relation to three foreign affiliate issues.

Subparagraph 5907(13)(b)(i) of the Regulations to the Income Tax Act

Subparagraph 5907(13)(b)(i) of the Regulations to the Income Tax Act (the "Regulations") refers to the "amount that would have been included in computing the taxable surplus of the affiliate ... if at that time the affiliate had disposed of all its excluded property for proceeds of disposition equal to the fair market value thereof at that time". Where a foreign affiliate actually disposes of excluded property, the amounts determined under subparagraph 5907(1)(f)(iii) and (iv) of the Regulations are included in taxable earnings and taxable surplus. Both of such amounts are net of any foreign income or profits tax paid to the government of a country that may reasonably regarded as a tax in respect of the taxable capital gain referred to therein. Accordingly, it is our view that to the extent the affiliate would have paid an income or profits tax to the government of a country in respect of such taxable surplus had such disposition actually taken place, the amount computed in subparagraph 5907(13)(b)(i) of the Regulations would be net of such notional tax.

Status of Mexican Capital Gains Tax as an Income or Profits Tax

Our understanding of the Mexican tax in respect of which your inquiry is made is that it is a tax on gains from the transfer of immovable property, shares or company interests. The tax is assessed under Article 151 of the Mexican Federal Tax Code at a rate of 20% of the gross receipts (proceeds of disposition). Furthermore, it is our understanding that the tax is covered by the Tax Convention between Canada and the United Mexican States (the "Convention"). That is, the exemption in Article 13 of the Convention would, if otherwise applicable, apply to exempt a resident of Canada from such a tax. In our view, such tax would be considered an income or profits tax for the purposes of the Income Tax Act (the "Act").

Application of Paragraph 95(2)(f) of the Act Where a Foreign Affiliate's Shares are Held Through a Partnership

Where a partnership owns not less than 10% of a particular class of the shares of a non-resident corporation, it is our view that for the purpose of computing the income of the Canadian resident partners of such partnership, the non-resident corporation would be a foreign affiliate of the partnership. Accordingly, if the non-resident corporation subsequently, becomes a foreign affiliate of a taxpayer who was a partner of the partnership and who did not deal at arm's length with the partnership, the capital gains of the foreign affiliate in relation to such taxpayer, would, pursuant to subparagraph 95(2)(f)(iv) of the Act, include any portion thereof as may reasonably be considered to have accrued during the period the affiliate was a foreign affiliate of the partnership.

Whether or not a particular partner deals at arm's length with the partnership is a question of fact.

As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, issued by Revenue Canada, Taxation the foregoing opinions are not advance income tax rulings and are not binding on the Department.

We trust that the foregoing comments are of assistance to you.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch