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 are corporations "members of a group of corporations" for the purposes of 95(2)(a)(ii)(D)?
Position: When those corporations actually combine their results of operations in arriving at their combined tax liability under foreign tax law.
Reasons: Only then is the interest relevant in computing the income of a group. In any other circumstance the interest is relevant in computing the liability for tax of only one corporate entity.
IFA (Canadian Branch) 1997 Seminar Revenue Canada - Finance Panel
Question 4
Subclause 95(2)(a)(ii)(D)(V) - Meaning of "Group"
At the 1996 Corporate Management Tax Conference of the Canadian Tax Foundation, Revenue Canada commented on the application of clause 95(2)(a)(ii)(D) to a structure in which a corporation resident in Canada ("Canco") controlled a group of foreign affiliates resident in the United States. Canco held shares of a holding corporation ("US Holco") resident in the United States which in turn owned 100% of the shares of four operating subsidiaries called S1 - S4. US Holco had borrowed money from another foreign affiliate of Canco ("Finco") in circumstances where the interest on the borrowed money would be included in the income of Finco from an active business under clause 95(2)(a)(ii)(D) provided that the requirements of subclause (V) thereof were satisfied. US Holco and S1 - S4 file a tax return in the United States on a consolidated basis.
It was Revenue Canada's view that the interest paid by US Holco would not be included in the income from an active business of Finco under 95(2)(a)(ii.)(D) because the shares of S4 were not excluded property. Revenue took this view despite the fact that only 30% of the assets of S4 were not excluded property and that they generated less than 5% of the group's total income. In coming to this conclusion, Revenue Canada seems to have assumed that foreign law applies for the purposes of defining a group for the purposes of 95(2)(a)(ii)(D). Has Revenue Canada reconsidered its position on this matter?
Revenue Canada's Position
Subclause 95(2)(a)(ii)(D)(V) requires that the "amounts paid or payable are relevant in computing the liabilitv for income taxes in that country of a group of corporations...". It is Revenue Canada's view that since it is the income tax law of the foreign country which determines the liability for income taxes in that country, it, as well, would define the members of the "group" whose liability is being determined. Therefore, in order to satisfy the test in subdause 95(2)(a)(ii)(D)(V), the "second affiliate" referred to therein and one or more other affiliates must be resident in a country (e.g. the United States or the United kingdom) which has a combined, consolidated or imputation system of corporate taxation and the "second affiliate" and one or more other foreign affiliates must 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. In the above example, the group will be comprised of each corporation whose U.S. income tax filing obligations are satisfied by filing a consolidated tax return. Since the shares of 54 are not excluded property, the requirements of subdause 95(2)(a)(ii)(D)(V) are not satisfied and clause 95(2)(a)(ii)(D) does not apply to the interest earned by Finco.
Prepared by: Olli Laurikainen
Date: May 15, 1997
File: 971274
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