30 October 2003 External T.I. 2003-0045515 - Foreign Tax Credit

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a portion of a minimum tax can be eligible for a foreign tax credit.

Position: No

Reasons: There is no portion of the minimum tax that is based on net income and therefore no portion of the minimum tax is an "income or profits tax".

XXXXXXXXXX 						2003-004551
		 	 				Gilles L. Gosselin
November 4, 2003

Dear Sir:

Re: Foreign Tax Credit

We are writing in response to your letter dated October 24, 2003 wherein you ask for a clarification of a position that we stated in our letter dated June 20, 2003 to the XXXXXXXXXX regarding whether the New Jersey Corporate Business Tax (NJCBT) paid by XXXXXXXXXX (e.g. Canadian XXXXXXXXXX companies) is eligible for a foreign tax credit in Canada.

In our letter we stated:

... the US$200 minimum tax paid to the State of New Jersey pursuant to the NJCBT is not eligible for a foreign tax credit in Canada pursuant to subsection 126(2) of the Act because it is not determined as a percentage of income and is therefore not an "income or profits tax". But the minimum fee is deductible from income pursuant to paragraph 18(1)(a) of the Act because it is incurred for the purpose of gaining or producing income.

In your letter you ask us whether we concur with your following analysis.

Canadian XXXXXXXXXX A has no permanent establishment in the United States. Company A conducts XXXXXXXXXX into the State of New Jersey (State). Company A fills out the required tax forms for the current tax year to comply with the State's CBT requirements. According to the CBT calculation methods Company A owes $300; however, due to the New Jersey tax law Company A must pay the State the minimum CBT payment of $500. Company A submits a check to the State for $500.

XXXXXXXXXX believes, based on your June 20th memo that Company A, for Canadian tax purposes could declare that $300 of the $500 CBT payment is eligible for a foreign tax credit and that the remaining $200 is deductible pursuant to paragraph 18(1)(a) of the Income Tax Act because it is incurred for the purpose of gaining or producing income.

Assuming that the minimum tax paid to the State of New Jersey pursuant to the NJCBT has increased from US$200 (the minimum tax that we state in our June 20, 2003 letter), to US$500, (the minimum tax that you state in your letter), it is still our understanding that the minimum tax must be paid if Company A is "doing business" in the State (see paragraph 1 of our letter dated June 20, 2003) and therefore has no relation to the income that Company A is earning in the State. In other words, once it is determined that a company is "doing business" in the State, the company owes at least the minimum tax no matter what the result of the calculation that you refer to in your letter.

Also it is not completely accurate to state in your example that "According to the CBT calculation methods Company A owes $300; however, due to the New Jersey tax law Company A must pay the State the minimum CBT payment of $500" [emphasis added] because once the NJCBT applies Company A cannot "owe" less than $500. It must be remembered that the calculation that you refer to is only a part of the NJCBT and the liability pursuant to that tax is not determined until the entire tax is taken into consideration (i.e. the minimum tax as well as the calculation that you refer to).

Accordingly, as we stated in our letter dated June 20, 2003, the minimum tax is deductible from income pursuant to paragraph 18(1)(a) of the Act because it is incurred for the purpose of gaining or producing income. However, the point that we will clarify is that only amounts beyond the minimum tax are eligible for a foreign tax credit because only those amounts are based upon net income and are therefore an "income or profits tax" pursuant to the definition of "business income tax" in subsection 126(7) of the Act.

Our comments are provided in accordance with the practise outlined in Information Circular 70-6R5. We trust that they are of assistance.

Yours truly,

Jim Wilson
for Director
International & Trusts Division
Income Tax Rulings Directorate
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