24 September 1999 Internal T.I. 9919789 - TAX CREDITS FOR U.S. STATE TAXES

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 certain State taxes are creditable

Position: Depending on the bases of how the taxes are computed

Reasons: see text in the memo

		September 24, 1999

	XXXXXXXXXX 	International Section
	XXXXXXXXXX 	S. Leung
		957-2115

		991978

Foreign Tax Credits for Taxes Paid to Certain States
of the United States by Canadian Trucking Companies

We are writing in response to your memorandum of July 7, 1999 in which you requested our view as to whether U.S. taxes paid by Canadian trucking companies to the following States of the United States are eligible for foreign tax credits in Canada. You have provided us with the following information in this regard:

1. Article 9 (Corporation Tax) and Article 9-A (Franchise Tax on Business Corporation) of Tax Law, Chapter 60, New York State Consolidated Laws and certain information related thereto;

2. Sections 7401 to 7409 of Article IV (Corporate Net Income Tax) and Sections 7601 and 7602 of Article VI (Capital Stock - Franchise Tax) of Pennsylvania Consolidated Statutes, Title 72, Taxation and Fiscal Affairs, and certain information related thereto;

3. Section 12-6-530 and Sections 12-6-2210 to 2320 of South Carolina Income Tax Act (Title 12 of Chapter 6 of South Carolina Code of Laws) and certain information related thereto;

4. Sections 30, 38 and 39 of chapter 63, Taxation of Business Corporation, General Laws of Massachusetts and the 1998 Massachusetts Corporation Excise Return 355A/355B Schedules and Instructions as well as Form 355B Foreign Business or Manufacturing Corporation Excise Return; and

5. Sections 5733.01, 5733.05, 5733.051, 5733.052 and 5733.06 of Ohio Revised Code and Ohio Corporation Franchise Tax General Instructions and Information as well as Form FT-1120 Ohio Corporation Franchise Tax Report for 1998.

We also acknowledge the receipt of a summary of the bases for taxation and the tax rates ("the Summary") in respect of corporations carrying on a trucking business in the above-mentioned States.

Our Comments

In the comments below, all dollar amounts are in U.S. currency.

(1) New York State

From the information you provided, it is our understanding that for the privilege of exercising its corporate franchise, or of doing business, or of employing capital, or of owning or leasing property in the State of New York in a corporate or organized capacity, or of maintaining an office in that state, a foreign corporation is required to pay a franchise tax under Article 9-A of the Tax Law unless the corporation elects to be taxed under sections 183 and 184 of Article 9 of the Tax Law. Pursuant to section 210 of Article 9-A of the Tax Law, the franchise tax is computed¹ as the sum of

(a) the highest of the amounts prescribed in (i), (ii), (iii) and (iv) below:

(i) 9% of the taxpayer's entire net income base (The taxpayer's entire net income base is defined as that portion of the taxpayer's entire net income allocated to the State of New York);

(ii) 0.178% of the taxpayer's total business and investment capital or the portion thereof allocated to the State of New York;

(iii) 3.5% of the taxpayer's minimum taxable income base (that base is defined as that portion of the taxpayer's minimum taxable income allocated to the State of New York); and

(iv) a fixed dollar amount varying from $325 to $1,500 depending on the level of gross payroll of the taxpayer; and

(b) 0.09% of the portion of the taxpayer's subsidiary capital allocated to the State of New York.

Each of the terms "entire net income", "business capital", "investment capital", "minimum taxable income" and "subsidiary capital" is defined under section 208 of Article 9-A of the Tax Law. For example, the term "entire net income" means total net income from all sources, which shall be presumably the same as the entire taxable income (but not alternative minimum taxable income) which the taxpayer is required to report to the United States treasury department; the term "minimum taxable income" shall mean the entire net income of the taxpayer increased by the amount of the federal items of tax preference and determined with the federal adjustments under sections 56 and 58 of the Internal Revenue Code.

For a taxpayer principally engaged in the conduct of a trucking business, the portion of the entire net income of the taxpayer to be allocated to the State of New York is determined as follows:

(A) multiplying its business income by a business allocation percentage which is computed by dividing the taxpayer's mileage within the State of New York by the taxpayer's mileage within and without the State of New York;

(B) multiplying its investment income by an investment allocation percentage;

(C) adding the products so obtained; and

(D) at the election of the taxpayer, deducting certain deductions specifically allowed.

Assuming that the Canadian trucking company does not have subsidiary capital allocated within the State of New York and provided that the New York State franchise tax is computed based on the method described in (a)(i) or (a)(iii) above, it is our view that such franchise tax is an income or profits tax for the purposes of section 126 of the Income Tax Act (the "Act"). If the Canadian trucking company has to pay tax on its subsidiary capital allocated within the State of New York, only that portion of the New York State franchise tax computed using the method described in (a)(i) or (a)(iii) above is considered to be an income or profits tax for the purposes of section 126 of the Act. New York State franchise tax computed using methods other than those described in this paragraph is not considered to be an income or profits tax because such tax is not based on income or profits but rather on capital invested or payroll expenditure. However, such tax is deductible in computing income of the Canadian trucking company under paragraph 18(1)(a) of the Act.

As noted above a taxpayer could, in some circumstances, elect to be taxed under sections 183 and 184 of Article 9 of the Tax Law instead of the provisions of Article 9-A thereof. Section 184 of Article 9 states that the tax rates are 0.6% before July 1, 2000 and 0.375% after June 30, 2000. The tax is on the taxpayer's gross earnings from all sources within the State of New York which is allocated by multiplying its gross earnings from transportation services within and without the state by a fraction, the numerator of which is the taxpayer's mileage within the State of New York and the denominator of which is the taxpayer's mileage within and without that state.

It is our view that the New York State franchise tax levied under section 184 of Article 9 of the Tax Law is not an income or profits tax and is therefore not creditable for foreign tax credit purposes under the Act. This is because the tax is based on gross business income and is paid whether or not there is any net business income or profits. However, such a tax is deductible in computing income pursuant to paragraph 18(1)(a) of the Act.

(2) Pennsylvania

Every corporation is subject to and is liable to pay Pennsylvania's corporate net income tax and capital stock - franchise tax for the privilege of (i) doing business in Pennsylvania, (ii) carrying on activities in Pennsylvania, (iii) having capital or property employed or used in Pennsylvania, or (iv) owning property in Pennsylvania, by or in the name of itself, or any person, partnership, association, limited partnership, joint-stock association, or corporation.

The corporation net income tax is at a rate of 9.99% on taxable income which is defined as the taxable income as computed on the return to the federal government plus certain tax preference items less certain additional deductions. In the case of trucking companies, the income is apportioned on the basis of total revenue miles within Pennsylvania over total revenue miles everywhere. A "revenue mile" is defined as being the average receipts derived from the transportation by the taxpayer of persons or property one mile.

In 1998 under an agreement between the trucking industry and the Pennsylvania Department of Revenue, a trucking company will have "nexus" in Pennsylvania in a given tax year only if it both travels more than 50,000 revenue miles in Pennsylvania (or if its Pennsylvania miles, if less than 50,000, are more than 20% of its total miles), and makes 12 or more pickups or deliveries in Pennsylvania in that year.

The Pennsylvania capital stock-franchise tax is computed at a rate of 1.199% on capital stock value which is defined as the product of one-half times the sum of the average net income capitalized at the rate of 9.5% plus 75% of the net worth, from which product shall be subtracted $125,000 (i.e., 0.5 x (average net income /0.095 + (0.75 x net worth)) - $125,000). The minimum franchise tax is $300.

For trucking companies which conduct business within and without Pennsylvania, the same apportionment rules described above for purposes of the corporate net income tax apply in the case of franchise tax.

It is our view that the corporate net income tax is an income or profits tax while the franchise tax is not because the latter tax is not based on net income or profits but rather on capitalized income and net worth. However, the franchise tax is deductible in computing income pursuant to paragraph 18(1)(a) of the Act.

(3) South Carolina

Pursuant to Section 12-6-530 of South Carolina Code of Laws, Title 12, Chapter 6, South Carolina Income Tax Act, every corporation, other than those described in Sections 12-6-540 and 12-6-550, and any other entity taxed using the rates of a corporation for federal income tax purposes, transacting, conducting, or doing business within the State of South Carolina or having income within that State, regardless of whether these activities are carried on in intrastate, interstate, or foreign commerce, is liable to a corporate income tax at the rate of 5% on the South Carolina taxable income. Such taxable income of a trucking company is the apportionment of total taxable income based on a fraction, the numerator of which is vehicle miles within that State and the denominator of which is total vehicle miles everywhere.

We have not been provided any information as to how taxable income is computed for South Carolina corporate income tax purposes. Provided that such taxable income is computed on a basis similar to that under the Internal Revenue Code, it is our view that the South Carolina corporate income tax described above is an income or profits tax creditable for Canadian foreign tax credit purposes.

Pursuant to Section 12-19-70 of Chapter 19 of Title 12 of the 1976 Code of Laws of South Carolina, South Carolina imposes a license fee to corporations at the rate of one mill upon each dollar paid to the capital stock of the corporations. It is our view that such license fee is not an income or profits tax but is deductible in computing income under paragraph 18(1)(a) of the Act.

(4) Massachusetts

Massachusetts' corporation excise tax is computed as the greater of the following amounts:

(a) an amount equal to the sum of :

(i) 0.7% of the value of the taxable tangible property if the corporation is a tangible property corporation or 0.7% of the net worth of the corporation if the corporation is an intangible property corporation; and

(ii) 8.33% of the taxable net income of the corporation; or

(b) $400.

Taxable net income for this purpose is the net income for federal income tax purposes after certain adjustments. If the corporation has taxable net income within and without the State, the taxable net income of the corporation is computed by multiplying the taxable net income by a fraction, the numerator of which is the property factor plus the payroll factor plus two times the sales factor, and the denominator of which is four. The property factor is a fraction, the numerator of which is the average value of the corporation's real and tangible personal property owned or rented and used in the State and the denominator of which is the average value of all the corporation's real and tangible personal property owned or rented. The payroll factor is the fraction, the numerator of which is the total amount paid in the State by the corporation for compensation, and the denominator of which is the total compensation paid everywhere. The sales factor is a fraction, the numerator of which is the total sales of the corporation in the State and the denominator of which is the total sales of the corporation everywhere.

In our opinion, if the excise tax is computed on the basis of (a) described above, only that portion of the tax which is computed under (a)(ii) is considered to be an income or profits tax and is eligible for the foreign tax credit for the purposes of the Act. The balance will be allowed as a deduction in computing income pursuant to paragraph 18(1)(a) of the Act. If the excise tax is the amount specified in (b) above, as this amount paid is independent of whether there is any net business income or profits, such tax is not creditable for Canadian foreign tax credit purposes but deductible in computing income pursuant to paragraph 18(1)(a) of the Act.

(5) Ohio

Every for-profit domestic corporation and every foreign corporation organized for-profit for the privilege of doing business in Ohio, owning or using part or all of its capital or property in Ohio, holding a certificate of compliance with the laws of Ohio authorizing it to do business in Ohio, or otherwise having nexus with Ohio under the Constitution of the United States is subject to the franchise tax of Ohio.

The Ohio franchise tax for a corporation other than a financial institution is determined as follows:²

The greater of (a) or (b) where (a) is the greater of :

(1) 5.1% of net income to the extent of $50,000 plus 8.5% of net income in excess of $50,000; or

(2) 0.4% of net worth to a maximum of $150,000;

and (b) is $50.

The taxpayer's method of accounting under the net income base must be the same as its method of accounting for federal tax purposes. Net income is determined after certain adjustments made to the taxable income for federal income tax purposes and after the apportionment formula by multiplying the corporation's net income by a fraction reflecting the property, payroll and sales factors.

Net worth is defined to be the net value of a corporation's assets less the net carrying value of its liabilities and is determined after the application of the above-noted apportionment formula.

Provided that the franchise tax liability is computed on the basis of (a)(1) above, it is our opinion that the franchise tax is an income or profits tax creditable for the purpose of section 126 of the Act. Otherwise, it is not an income or profits tax but is deductible in computing income of the taxpayer under paragraph 18(1)(a) of the Act.

If you have any question concerning the above, please do not hesitate to contact us.

for Director
Reorganization and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

¹ It should be noted that the basis of taxation described herein is different from that described under the caption "Tax Base" in the Summary that you have provided to us.

² Note that this is different from the Summary you provided in which you noted under the tax rate column that it is the greater of (A)+(B) or (A)+(C). We think it should be the greater of ((A)+(B)) or (C).

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