7 October 1997 External T.I. 9614265 - TEXAS STATE FRANCHISE 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.

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 Texas State Franchise Tax is an income or profits tax for the purposes of "foreign accrual tax" definition in subsection 95(1).

Position:

Not if based on net taxable capital. May be if based on net taxable earned surplus in certain circumstances.

Reasons:

We have looked at similar franchise taxes at the state level. should be based on profits earned in that year.

	                                    	961426
XXXXXXXXXX                                   	J. Stalker

Attention: XXXXXXXXXX

October 7, 1997

Dear Sirs:

Re: Subsection 91(4) of the Income Tax Act (the "Act")

We are writing in response to your letter dated April 17, 1996 in which you asked whether Texas State Franchise Tax would qualify as an income or profits tax for the purposes of the definition of "foreign accrual tax" in subsection 95(1) and of subsection 94(1) of the Act. We also acknowledge the package of information you sent to us, including legislation, on April 9, 1997. We apologize for the delay in replying and regret that our workload prevented an earlier response.

From our review of the material you sent in, it is our understanding that corporations pay a tax in Texas on the greater of "net taxable capital" or "net taxable earned surplus". Taxable capital is based on a corporation's stated capital (capital stock) plus surplus. Taxable capital is apportioned using a single gross receipts factor. Earned surplus basically includes federal net taxable income plus compensation paid to officers and directors of a corporation for those corporations with more than 35 shareholders. For the earned surplus calculation, "unitary income" is apportioned using a single gross receipts factor but non-unitary income is allocated to Texas if Texas is the corporation's commercial domicile. The gross receipts factor is a fraction where the numerator is basically gross receipts from business done in Texas (where this is defined in the legislation) and the denominator is gross receipts from the corporation's entire business.

It is our view that when the Texas State Franchise Tax is computed based on net taxable capital in a particular year, it would not be an income or profits tax. If instead, the Texas State Franchise Tax paid is computed based on net taxable earned surplus in a particular year, it may be an income or profits tax; however, each situation should be looked at individually. For example, a corporation may pay Texas State Franchise Tax based on net taxable earned surplus in a year even though its taxable income is nil, because the computation requires that compensation paid to its officers and directors be added to the base (where the corporation has more than 35 shareholders). In such a case, the Texas State Franchise Tax would not be an income or profits tax. As another example, there is an additional tax of 4.5% of net taxable earned surplus if the corporation no longer has sufficient nexus with Texas to be subject to a tax based on earned surplus. This tax is based on the earned surplus of the last year. Again we would say this is not an income or profits tax in that year since the tax is not based on profits earned in that year.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

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