20 January 2011 External T.I. 2010-0386661E5 - Reporting US income for a Canadian holding company

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.

Principal Issues: 1. How should a Canadian holding company report its US subsidiary's income in its T2 return even though no dividend has been paid? 2. Whether US tax paid by a US subsidiary could be deducted from Canadian tax payable if a Canadian holding company reports its US subsidiary's income in its T2 return?

Position: 1. Where a non-resident corporation is a "controlled foreign affiliate" ("CFA") of a taxpayer, the taxpayer must include its share of the "foreign accrual property income" ("FAPI") of the CFA for Canadian tax purposes. 2. A deduction may be available where the taxpayer has included a FAPI amount under subsection 91(1) of the Act in computing income in respect of a share of the capital stock of a CFA of the taxpayer.

Reasons: 1. Subsection 91(1) of the Act 2. Subsection 91(4)

XXXXXXXXXX
									2010-038666
									Minguy Choi
January 20, 2011							613-957-2062

Dear XXXXXXXXXX :

This is in reply to your letter of 8th November 2010, in which you enquired whether a Canadian holding company must report its US subsidiary's income in its T2 return, and if so, whether US tax paid by the US subsidiary could be deducted from Canadian tax payable.

More specifically, your client is a Canadian holding company ("CANCO") which owns 100% of the shares of a US corporation ("USCO") incorporated in the United States of America ("US"). USCO is a resident of the US for the purposes of the Canada-United States Tax Convention (1980) (the "Convention"). USCO carries on business in the US and has net income for the fiscal year 2010. CANCO did not have any business activities except for owning 100% of the shares of USCO. There have been no inter-company transactions and no dividend has been paid. The year end date for both companies is July 31. USCO has filed its tax return and paid its tax to the Internal Revenue Service (IRS) in the US.

Our Comments

The particular circumstances outlined in your letter appear to relate to factual situations involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When a situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments.

Taxation of Shareholders of Corporations Not Resident in Canada

Section 3 of the Income Tax Act provides the rules by which a taxpayer resident in Canada determines its income for the purposes of Part I. Specifically, paragraph 3(a) instructs the taxpayer to determine the total of all amounts each of which is its income from a source inside or outside Canada, such as the taxpayer's income from each office, employment, business and property.

Subdivision b of Division B of Part 1 of the Act provides the rules under which a taxpayer computes its income from a business or property. Paragraph 12(1)(k) is in subdivision b. It provides that the taxpayer must take into income the amounts required by subdivision i to be included in income in respect of a dividend paid by a corporation not resident in Canada, or in respect of a share of a foreign affiliate of the taxpayer.

Section 90 and subsection 91(1) of the Act are in subdivision i. Section 90 provides that a taxpayer must include in income dividends received from a corporation not resident in Canada. Where a non-resident corporation is a "controlled foreign affiliate" ("CFA") of a taxpayer (e.g., based on the facts above, USCO is a CFA of CANCO), subsection 91(1) provides that the taxpayer (CANCO) must include in income its share of the foreign accrual property income ("FAPI") of the CFA (USCO) for Canadian tax purposes as income from the share. The term "FAPI" is defined in subsection 95(1) as an amount determined by a formula. We note that FAPI should be reported on line 217 of T2 Schedule 1 Net Income (Loss) for Income Tax Purposes.

Foreign Taxes Paid

The facts that we set out above indicate that USCO carries on business. Income from business may be FAPI in certain circumstances. When FAPI has been included in a shareholder's income under subsection 91(1) of the Act, subsection 91(4) permits a deduction in respect of foreign income taxes paid by a CFA that are applicable to the FAPI amount.

Foreign Reporting

Section 233.4 of the Act requires a taxpayer resident (CANCO) in Canada of which a non-resident corporation is a CFA (USCO) at any time in the year, to file in respect of the affiliate, Form T1134-B, Information Return Relating to Controlled Foreign Affiliates within 15 months after the end of its taxation year. Please visit the CRA website http://www.cra-arc.gc.ca or please contact a Tax Services Office for more information.

We trust that the comments above are of assistance.

Yours truly,

Olli Laurikainen,
for Director
International and Trusts Division
Income Tax Rulings Directorate