17 April 1996 External T.I. 9505465 - DEDUCTIBILTY OF TAX UNDER 1113(1)(C) AND 93(1) ELECTION

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.

Principal Issues:

Whether a tax to a non-treaty country on the sale of the shares of a foreign affiliate would be deductible under paragraph 113(1)(c), where a subsection 93(1) election has been made.

Position TAKEN:

Not enough facts to determine and not clear if it would be an income and profits tax.

Reasons FOR POSITION TAKEN:

Law.

XXXXXXXXXX				950546

Attention: XXXXXXXXXX

April 17, 1996

Dear Sirs:

Re: Subsection 93(1) and Paragraph 113(1)(c) of the Income Tax Act (the "Act")

We are writing in response to your letter in which you requested our views on the amount deductible under paragraph 113(1)(c) where an election has been made under subsection 93(1) of the Act.

You have presented a scenario where a corporation which is a Canadian private corporation ("Parent Company") owns all of the shares of a foreign subsidiary resident in and conducting active business in a non-treaty country which is not listed under subsection 5907(11) of the Regulations. Accordingly, the subsidiary's earnings would constitute "taxable surplus" as defined in paragraph 5907(1)(k) of the Regulations. Parent Company sells the shares of the foreign subsidiary to an arm's-length party, and the foreign country in which the subsidiary is resident and carries on business levies a tax, exigible from Parent Company, on the sale of the shares (the "transfer tax"). Parent Company elects under subsection 93(1) of the Act to effectively recharacterize the sale proceeds which represent the entirety of the gain as instead a dividend for purposes of the Act.

It would appear that your query involves a factual situation involving a possibly completed transaction. As indicated in paragraph 21 of Information Circular 70-6R2, we are not in a position to deal with factual proposed transactions other than in the form of an advance ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. Issues involving completed transactions should be addressed to the appropriate Taxation Services Office of Revenue Canada.

In any event, we have no basis to make the determination of whether an amount in respect of the tax on the sale of the shares would be deductible under paragraph 113(1)(c) of the Act without looking at the specific facts on a case by case basis. For example, it is not clear to us whether the transfer tax would be an income and profits tax. Moreover if the transfer tax was an income or profits tax, it would be difficult without a review of the actual situation to determine what portion, if any, of the tax paid would be applicable to the deemed dividend for the purposes of paragraph 113(1)(c) of the Act.

Questions of fact of this nature are best resolved by officials of your local Taxation Services Office after a thorough review of all the facts involved.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch