23 March 1994 Administrative Letter 9332416 F - Japan Inhabitant's Tax — Income or 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.

PRINCIPAL ISSUES:

Japanese "Inhabitant's Tax"  —  Is it an "Income or Profits Tax"?

POSITION TAKEN:

Yes.

REASONS FOR POSITION TAKEN:

Tax is computed as a percentage of income.

March 23, 1994

Attention: V.L. Licardo

XXXXXXXXXX

This is in reply to your memorandum dated January 5, 1994, in which you asked for our comments concerning whether the Japanese "Inhabitant's Tax" would be considered an "income or profits tax" for purposes of paragraph 126(7)(c) of the Income Tax Act ("Act"). In addition to our comments on the "Inhabitant's Tax", we have commented on the application of the Canada-Japan Income Tax Convention ("Convention") and residence matters that may pertain to XXXXXXXXXX (the "taxpayer").

Japanese "Inhabitant's Tax"

We do not have sufficient information to permit us to formulate a definitive opinion as to whether the foreign tax described in the taxpayer's 1991 return is an income or profits tax, as that term is defined for purposes of paragraph 126(7)(c) of the Act, which is eligible for inclusion in the taxpayer's foreign tax credit calculation. In this regard we would require a copy of the relevant taxing statute under which the foreign tax was assessed. We can, however, based on the summaries of the Japanese tax system as provided by the Japanese Embassy (the "summaries") , provide the following general comments.

The criteria used by the Department to determine eligibility for the foreign tax credit are summarized in Interpretation Bulletin IT-270R2 (the "bulletin") dated February 11, 1991. With respect to the issue as to whether the foreign tax is an "income or profits tax", we refer you to paragraph 8 of the bulletin.

"In determining whether or not a particular foreign tax qualifies as an "income or profits tax", the basic scheme of application is compared with that of the Canadian Income Tax Act. If the basis of taxation is substantially similar, the foreign tax is accepted as an income or profits tax. To be "substantially similar", the foreign tax must be levied on net income or profits (but not necessarily as would be computed for Canadian tax purposes) unless it is a tax similar to that imposed under Part XIII of the Act."

The foreign tax at issue was referred to as a "Residential Income Tax" on the information slip provided in the taxpayer's 1991 return and as an "Inhabitant's Tax" in the November 4th letter from the XXXXXXXXXX  We have assumed that the foreign tax at issue is the tax described in the summaries under the heading of either "Prefectural Inhabitants Tax" or "Municipal Inhabitants Tax".

The "Prefectural Inhabitant's Tax" comprises of both a per capita tax and an income tax. The per capita tax appears to be a standard fixed rate per person per annum. Such a tax is not an "income or profits tax" for purposes of the Act. However, based on the summaries, the standard per capita rate was 700 yen per person. Using today's exchange rate, that would convert to approximately $8.00 Canadian. The portion of the "Prefectural Inhabitant's Tax" pertaining to the income tax component, which for all intent and purposes is the entire amount of the tax, would appear to be an "income or profits tax" for purposes of the Act. In this regard, the computation of the income tax component of the "Prefectural Inhabitant's Tax" is based on either 2% or 4% of annual income. Even though the computation of annual income as described in the summaries is not identical to the computations made under Canadian law, they are, in our opinion, "substantially similar".

It is not clear from the summaries whether the "Municipal Inhabitant's Tax" is comprised of just an income tax component or an income tax and per capita component. Regardless, if there is a per capita component, it would appear to be similar to the per capita tax computed in the "Prefectural Inhabitant's Tax" and is therefore likely insignificant. The computation of the "Municipal Inhabitant's Tax" appears similar to that of the "Prefectural Inhabitant's Tax" in that it is based on a percentage of annual income and for the same reasons mentioned above we would be inclined to view such a tax as an "income or profits tax".

Article 4 of the Convention

The taxpayer, XXXXXXXXXX has not severed her residential ties with Canada and continues to file Canadian tax returns as a factual resident of Canada. Based on the information provided, the taxpayer spends four years at a time in Japan and then returns to Canada for furlough. Each furlough in Canada may last between 6 to 12 months. Based on the above facts, the taxpayer may be a factual resident of Japan as well as Canada (i.e. a dual resident). This creates the possibility that the Japanese taxation authorities consider the taxpayer a resident of Japan for the purpose of the Convention. If the taxpayer can determine from the Japanese tax authorities that such is the case she may wish to contact the Japanese competent authority and request that they contact the Canadian competent authority with the view of reaching a mutual agreement as to which country she will be considered resident of for the purpose of the Convention. If the tie is settled in favour of Japan, the taxpayer will still be considered a resident of Canada for Canadian tax purposes, however, Canada would likely have to provide a deduction under paragraph 110(1)(f) of the Act for most non-Canadian source income. For example, Article 15 of the Convention would deny Canada the right to tax remuneration received by a resident of Japan in respect of employment activities exercised in Japan.

We trust the above comments will be some assistance. Attached is the taxpayer's 1991 T1 return and other related correspondence.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental  Affairs Branch