18 February 2000 Internal T.I. 2000-0002687 - Foreign Affiliates Reassessment Period

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 an assessment in respect of foreign accrual property income can be considered to be made as a consequence of the transaction whereby the taxpayer acquired the shares of the controlled foreign affiliate.

Position: Yes, in a case where the capital invested by the taxpayer in the controlled foreign affiliate is used by the controlled foreign affiliate to acquire foreign accrual property income earning property.

Reasons: In such case there is a direct causal connection between the investment in the foreign affiliate and the FAPI income of the foreign affiliate.

		February 18, 2000

	International Tax Directorate	International Section
	Policy and Procedures Section	Olli Laurikainen
	René Fleming, Acting Manager	957-2116

	Attention:  Joyce Crago
		2000-000268

Subsection 152(4)(b)(iii) of the Income Tax Act (the "Act")

This is in response to your request that we consider whether an assessment, reassessment or additional assessment of a taxpayer in respect of foreign accrual property income ("FAPI") may be made at any time that is before the day that is 3 years after the end of the normal reassessment period pursuant to subparagraph 152(4)(b)(iii) of the Act on the basis that such assessment can be viewed as having been made as a consequence of the transaction between the taxpayer and a non-resident (i.e. the controlled foreign affiliate) whereby the taxpayer invested in the shares of the controlled foreign affiliate ("CFA"). You are particularly concerned about our comments set out in document number E9311077 dated July 5, 1993.

As noted in that document, it is a question of fact whether a reassessment "can reasonably be regarded as relating to" a transaction. Therefore we would like to clarify that in our view, the provisions of subparagraph 152(4)(b)(iii) of the Act will extend the period during which an assessment or reassessment may be made provided it is established that there is a causal connection [i.e. it can reasonably be regarded as relating to, as required by subsection 152(4.01)] between the FAPI earned by the CFA and the taxpayer's investment in the shares of that affiliate and provided the shares were acquired by the taxpayer directly from the CFA. For example, where a taxpayer incorporates a CFA and capitalizes it with $100M, if the FAPI arises directly as a consequence of the investment by the CFA of such $100M in a portfolio of FAPI earning properties, then it is our view that the assessment of the taxpayer in respect of such FAPI can be considered to have been made as a consequence of a transaction and the FAPI can reasonably be regarded as relating to a transaction (i.e. the investment in CFA) involving the taxpayer and a non-resident person (i.e. the CFA). On the other hand, if the foreign affiliate initially uses the invested capital in an active business, the business is some time later wound down, and the CFA earns FAPI at that time, we are of the view that the FAPI assessment may be too remotely related to the original investment in the CFA "to be reasonably be regarded as relating to" the original investment in the CFA for the purposes of subsection 152(4.01) of the Act. Moreover, in a case where a taxpayer acquires the shares an existing foreign corporation from another person and the foreign corporation becomes a CFA of the taxpayer on that acquisition, it is our view that such transaction would not be considered as involving the CFA for the purposes of subparagraph 152(4)(b)(iii) of the Act.

In any case where a taxpayer fails to report significant amounts of FAPI earned by a controlled foreign affiliate, it may be possible to make a reassessment in respect of such FAPI after the normal reassessment period under subparagraph 152(4)(a)(i) of the Act on the basis that the failure to report the FAPI was a misrepresentation that is attributable to neglect, carelessness, or willful default on the part of the taxpayer. This is particularly true for taxation years of foreign affiliates of taxpayers that begin after 1994 because the dividing line between FAPI and active business income was significantly clarified with the coming into force of new foreign affiliate legislation. Under the earlier legislation, a taxpayer may be able to take the position that the failure to report FAPI was due to the fact that it was mistaken for active business income.

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

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