13 December 1994 Internal T.I. 9430770 - FOREIGN AFFILIATE - TAXATION YEAR

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.

DRAFT

REVENUE CANADA ROUND TABLE

Tax Executive Institute Conference

December 13, 1994

Question No. XVI

FOREIGN AFFILIATE - TAXATION YEAR

Foreign accrual property income ("Fapi") computations are determined pursuant to the rules in subdivision i of the Act. Earnings from an active business of a foreign affiliate are computed pursuant to the rules in Regulation 5907(1)(a). Paragraph 95(2)(b) deems certain income from services, that would otherwise be active business income, to be income from a business other than an active business. In the following circumstances what is the taxation year that Revenue Canada will apply in computing the paragraph 95(2)(b) income from services of the controlled foreign affiliate?

A corporation resident in Canada has a June 30 taxation year end and wholly owns a controlled foreign affiliate that is incorporated and resident in Singapore. For commercial accounting purposes, the foreign affiliate maintains a September 30 year end. Under Singapore law a corporation incorporated in Singapore must employ a December 31 year end for tax purposes. Singapore law also states that, where a corporation maintains an accounting year end that differs from the deemed year end for income tax purposes, the corporation must calculate its "business income" in accordance with its accounting year (September 30 basis) and all other income (e.g. investment income) is calculated as at December 31. As a result, the December 31 tax year return for the affiliate reflects business income calculated on the basis of the October-to-September year, and the passive investment income calculated on the basis of a January-to-December year.

In computing the Canadian taxpayer's income under subsection 91(1) for its June 30, 1994 taxation year will the Canadian company include its percentage of the Fapi of the controlled foreign affiliate in Singapore on the basis of the July 1993 to June 1994 or, pursuant to the accounting year end of its controlled foreign affiliate, on the basis of an October 1992 to September 1993 year? The latter calculation will reflect the income included in computing the foreign affiliate's income in Singapore at the end of the affiliate's 1993 taxation year end.

Department's Position

Generally, pursuant to subsection 91(1), in computing the income of a taxpayer resident in Canada there shall be included in respect of a share of a controlled foreign affiliate of the taxpayer, the share's "participating percentage" of the affiliate's Fapi for the taxation year of the affiliate ending in the taxation year of the taxpayer. Subsection 95(1) defines "taxation year" in relation to a foreign affiliate to mean the period for which the accounts of the affiliate have been ordinarily made up, but no such period may exceed 53 weeks.

In the above circumstances the period for which the accounts of the affiliate are normally made up is from October 1 to September 30. The paragraph 95(2)(b) income of the affiliate should be computed for this period. If the investment income of the affiliate is considered Fapi, then it would be included for this period as well.

The "foreign accrual tax" applicable to an amount included under subsection 91(1) for a taxation year is the portion of any income or profits tax paid by the affiliate that may reasonably be regarded as applicable to that amount. This is determined on a case by case basis.

Prepared by: Tim Kuss
Date: December 6, 1994
File # 943077