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 Regulations 5907(2)(f) is applicable to notional interest expense allowed under foreign laws
Position: Such notional deduction should not be included in the determination of "earnings" under Regulations 5907(1)
Reasons: It is because the notional adjustment has no impact on the foreign affiliate's actual income and on the amount that the foreign affiliate has available to pay dividends.
XXXXXXXXXX 983073
S. Leung
Attention: XXXXXXXXXX
December 22, 1999
Dear Sirs:
Re: Subsection 5907(1) of the Income Tax Regulations (the "Regulations ")
We are writing in response to your letter in which you requested a written confirmation of the application of paragraph 5907(2)(f) of the Regulations to deemed interest expense which is allowed to be deducted under foreign tax laws by the foreign affiliate of a taxpayer resident in Canada where no actual expense was nor will be incurred by it. You noted in your letter that in certain jurisdictions a foreign affiliate may be deemed to have paid interest on debt obligations issued by it in circumstances where the affiliate has not incurred and will not incur any actual interest expense and the deemed interest is deductible under the tax laws of the foreign jurisdiction.
We are of the opinion that the definition of "earnings" under subsection 5907(1) of the Regulations does not include any amounts of notional deductions or inclusions in the computation of the tax liability of the foreign affiliate under foreign tax laws. As the deemed interest expense is purely a notional adjustment, it has no impact on the foreign affiliate's actual income from carrying on an active business and on the amount that the foreign affiliate has available to pay dividends. Therefore, it is not taken into account in determining the "earnings" of the foreign affiliate as that term is defined under subsection 5907(1) of the Regulations.
As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinion expressed in this letter is not a ruling and is consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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