14 May 1997 External T.I. 9605355 - foreign affiliates-meaning group of corporations

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:

When is interest "relevant in computing the liability for income taxes...of a group of corporations" for the purposes of 95(2)(a)(ii)(D)(V).

Position:

Such would be the case where a group of corporations combine their results of operations for taxation year under the tax laws of a foreign country and the interest paid by the second affiliate reduces the combined results otherwise determined.

Reasons:

		960535
XXXXXXXXXX	O. Laurikainen
(613) 957-2116

Attention: XXXXXXXXXX

May 14, 1997

Dear Sirs:

Re: Clause 95(2)(a)(ii)(D) of the Act

This is in response to your letter wherein you requested our opinion in regards to certain interpretational issues associated with the above provision of the Income Tax Act (the "Act"). We apologize for the delay in replying.

Meaning of "Group"

The provision requires that the interest must be relevant in computing the liability for income taxes of the members of a group of corporations. You question what comprises a "group".

In our view the provision requires that the second affiliate and one or more other affiliates are resident in a country (e.g. the United States or the United Kingdom) which has a combined, consolidated or imputation system of corporate taxation. By this we mean that the group of companies, for tax purposes, are able to combine their results of operations for a taxation year.

However, the mere fact that second affiliate and one or more other foreign affiliates are resident in a foreign jurisdiction that has a combined or consolidated tax system of corporate taxation and such affiliates are entitled under such law to file tax returns on that basis, is not sufficient satisfy the test set out in subclause 95(2)(a)(ii)(D)(V) of the Act. Revenue Canada will view a "group" to exist only if the "second affiliate" and one or more other foreign affiliates actually combine their operating results as permitted under the foreign tax law. The "group" in any particular year will be comprised of only the second affiliate and the affiliate(s) that actually combine operating results with the second affiliate for tax purposes in the foreign jurisdiction.

Timing of Tests

You point out that each of the members of the "group" referred to in subclause 95(2)(a)(ii)(D)(V) of the Act must meet each of the following five separate tests in order for the group to qualify:

1) It must be a foreign affiliate of the taxpayer.

2) Its shares are excluded property.

3) It is resident in the same country as the second affiliate.

4) It is subject to income taxation in the same country as the second affiliate.

5) The taxpayer has a qualifying interest in it throughout the year.

You question at what particular time must the affiliates meet tests 1 - 4 above. In addition you question when the tests in subclauses 95(2)(a)(ii)(D)(III) and (IV) of the Act must be met.

In our view tests in 1-4 above, must be met by every member of the group at the time that the particular amount of interest is paid or becomes payable. If the group includes an ineligible member at that time, such payment will not be subject to clause 95(2)(a)(ii)(D) of the Act. Similarly, it is our view that the tests in subclauses 95(2)(a)(ii)(D)(III) and (IV) must be met at the time the particular amount of interest is paid or becomes payable.

Meaning of "Relevant in Computing Liability for Income Tax"

In our view the interest paid by the "second" affiliate referred to in clause 95(2)(a)(ii)(D) of the Act is relevant in computing the liability for income tax when the interest is deducted in computing the income for tax purposes of the group. For example, such would be considered to be the case where the interest is deducted in computing a loss of the second affiliate for a taxation year and that loss is then used to offset income of one or more other members of the group for that year.

The above are our general views concerning the operation of subparagraph 95(2)(a)(ii)(D) of the Act. We recognize that there may be other issues or considerations which may arise in connection with an actual case. However, such issues must in our view be resolved with knowledge of the facts of the case in connection with which they arise.

The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.

We hope that the above will be of assistance to you.

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