27 May 1998 IFA Roundtable, 9814010 - IMMIGRATION OF A FOREIGN AFFILIATE

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 a notional amount in respect of foreign tax that would have been paid had the assets of a foreign affiliate actually been disposed of on its emigration from the foreign country and immigration into Canada may be deducted in computing the income inclusion under 128.1(1)(d).

Position: Yes. If the foreign country does not provide for an actual departure tax similar to Canada's

Reasons: Words of 5907(13)

IFA Canadian Branch Seminar
May 28, 1998

Immigration of a Foreign Affiliate

Under paragraph 128.1(1)(b), where a non-resident corporation continues into Canada, the continuing corporation is deemed to have disposed of its assets other than assets described in subparagraphs 128.1(1)(b)(i) to (v) for fair market value. Where the continuing corporation is a foreign affiliate of a Canadian corporation, paragraph 128.1(1)(d) includes in the foreign accrual property income (“FAPI”) of the affiliate in respect of the Canadian corporation an amount computed pursuant to subsection 5907(13) of the Regulations. The amount prescribed by 5907(13) is essentially the taxable surplus of the affiliate at the end of the year that is deemed to have ended pursuant to subparagraph 128.1(1)(a)(i) (not including the affiliate’s net earnings for the year in respect of the affiliate’s FAPI) less the product obtained when certain underlying foreign tax (“UFT”) of the affiliate at that time is multiplied by the amount by which the “relevant tax factor” as defined in subsection 95(1) exceeds one. The taxable surplus of the foreign affiliate for the purposes of this computation includes an amount that arises as a result of the disposition of assets (other than capital property that is not excluded property) that is deemed to have occurred pursuant to paragraph 128.1(1)(b). Does the UFT of the affiliate at that time for the purposes of this calculation include a notional amount of foreign tax that would have been paid to the foreign country if the foreign affiliate had actually disposed of the assets?

Department’s Position

Yes. If the foreign country from which the affiliate emigrated does not provide for an actual departure tax similar to that provided for in subsection 128.1(4) for emigrants from Canada, the formula in subsection 5907(13) includes in the UFT of the affiliate a notional amount of foreign tax that would arise in the foreign county if the assets in question had actually been disposed of at fair market value. That amount is referred to in clause A of the formula in 5907(13) as the amount “that would have been added to that underlying foreign tax if each disposition deemed by paragraph 128.1(1)(b) had been an actual disposition”. Therefore if additional tax would have been payable in the foreign country had there been an actual disposition of the relevant assets, a notional amount may be computed and added to the UFT for the purposes of subsection 5907(13).

Prepared by: Olli Laurikainen

May 27, 1998