10 October 1996 Income Tax Severed Letter 9630775 - Foreign affiliates — meaning of relevant in 95(2)(A)(II)

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 an amount paid by a foreign affiliate could be considered "relevant in computing the liability for income taxes" for the purposes of 95(2)(a)(ii) if a deduction is allowed under foreign tax law resulting in an increased foreign tax credit carryover but the liability for income tax in the year the amount is deducted, is unchanged.

POSITION:

yes

REASONS:

The provision does not require that the amount paid be relevant in computing the liability for tax in the particular year in which it is paid.

963077 XXXXXXXXXX O. Laurikainen

Attention: XXXXXXXXXX

October 10, 1996

Dear Sirs:

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

This is in reply to your request for our views concerning the operation of the above provision in the following hypothetical circumstances.

1) Canco is a corporation resident in Canada.

2) Holco and Finco are wholly-owned foreign affiliates of Canco.

3) Finco makes a loan (the "Loan") to Holco. All the funds from the Loan are used by Holco to purchase all of the shares of a non-resident corporation ("Opco"). The interest paid on the Loan satisfies the conditions set out in subclauses 95(2)(a)(ii)(D)(I) and (II) of the Income Tax Act (the "Act").

4) The shares of Opco are "excluded property" for the purposes of the definition in subsection 95(1) of the Act.

5) Holco and Opco are resident the same designated treaty country ("Country X") as defined in proposed subsection 5907(11) of the Regulations.

6) Holco owns all the shares of another non-resident corporation ("Fopco") which is resident in another designated treaty country ("Country Y").

7) Fopco carries on, and derives all of its income from, an active business carried on by it in Country Y. 8) Fopco pays a dividend (the "Dividend") to Holco.

9) The liability for income taxes of Holco and Opco (together the "Group") is computed in Country X on a consolidated basis.

10) As the income or loss of Fopco is not included in the consolidated results of the Group for the purposes of computing the liability for income tax of the Group in Country X, Fopco is not a member of that "group of corporations" for the purposes of subclause 95(2)(a)(ii)(D)(V) of the Act.

11) The determination of the liability for income tax of the Group under the income tax laws of Country X is made as follows. A computation of the income liable for tax of the Group is made separately for domestic (i.e. Country X) source income and foreign source income (i.e. income from a source outside "Country X"). The Dividend represents foreign source income of the Group and a portion of the interest paid on the Loan (the "Allocated Interest") is allocated against such income and is therefore not deductible against income of the Group from sources in Country X. Had such interest allocation not been made, the Group would not have been liable for tax on the Dividend in Country X because foreign tax credits in respect of withholding taxes paid to Country Y on the Dividend would have been sufficient to eliminate the Country X tax liability that would have otherwise been computed vis-a-vis the Dividend. Country Y withholding taxes on the Dividend that are not claimed by the Group in the year may be carried forward and may be creditable in Country X in a future taxation year.

Accordingly, while the Allocated Interest does not reduce the liability of the Group for income taxes in Country X in the year the interest is paid, it increases the amount of a foreign tax credit carry- forward otherwise computed which may be deductible against the liability for income tax of the Group in Country X for future taxation years.

You question whether in the above circumstances the Allocated Interest paid by Holco would be considered "relevant in computing the liability for income taxes" of the Group in Country X for the purposes of clause 95(2)(a)(ii)(D)(V) of the Act.

Our Comments

It is our view that in the above circumstances, the full amount of the interest paid by Holco on the Loan including the Allocated Interest would be relevant in computing the liability for income taxes of the Group. Therefore, the full amount of the interest paid by Holco would be included in income from an active business of Finco pursuant to clause 95(2)(a)(ii)(D) of the Act.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of information Circular 70-6R2 and are not binding on Revenue Canada.

We trust the above is the information you require.

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