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
Question No. 31
EXEMPT EARNINGS OF A FOREIGN AFFILIATE - FOREIGN EXCHANGE GAINS
Assume that the only source of income of a particular foreign affiliate of a taxpayer, in respect of which the taxpayer has a qualifying interest throughout the year, is interest income in respect of a loan made to a non-resident corporation to which the particular affiliate and the taxpayer are related throughout the year. The loan proceeds were used in the non-resident corporation's active business carried on outside Canada and both the affiliate and the non-resident corporation are resident in a "designated treaty country" within the meaning of proposed subsection 5907(11) of the Regulations. The loan is denominated in U.S. dollars and the "calculating currency" of the foreign affiliate is Dutch guilders.
Pursuant to proposed clause 95(2)(a)(ii)(A) and proposed subclause 5907(1)(b)(iv)(B)(III) of the Regulations the interest income of the foreign affiliate would be included in its "exempt earnings" for the year. If the foreign affiliate realizes foreign exchange gains in respect of principal repayments made on the loan during the year would such gains be exempt earnings of the affiliate?
Department's Position
Pursuant to subparagraph 5907(1)(b)(i) of the Regulations, exempt earnings of a foreign affiliate for a taxation year include, in general terms, the amount by which the capital gains of the affiliate for the year exceed the aggregate of (A) the amount of its taxable capital gains for the year from dispositions of property, other than "excluded property", (B) the amount of the taxable capital gains referred to in clauses 5907(1)(f)(iii)(A) and 5907(1)(f)(iv)(C) of the Regulations and, (C) the income or profits tax that reasonably relates to the amounts computed under (A) and (B).
As the loan would be considered "excluded property" of the affiliate no amount would be computed under (A), above. As well, no amount would be computed under clause 5907(1)(f)(iv)(C) of the Regulations, as that clause relates to dispositions of shares or partnership interests. Proposed clause 5907(1)(f)(iii)(A) of the Regulations relates to dispositions of property used or held by the affiliate principally for the purpose of gaining or producing income from an active business carried on by it in a country that is not a designated treaty country (other than Canada). As a result, the entire foreign exchange gain less any income or profits tax related thereto would be included in the exempt earnings of the affiliate for the year.
Prepared by: Tim Kuss
Date: April 19, 1995
Control #: 951032
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