25 February 2000 External T.I. 1999-0009685 - Foreign affiliates - group relief

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 the portion of any interest payments which contribute to a loss of the payer foreign affiliate resident in the United Kingdom which cannot be surrendered to any other foreign affiliate resident in the United Kingdom, can nevertheless be considered as "relevant in computing the liability for income taxes in that country of the members of a group of corporations..." for the purpose of subclause 95(2)(a)(ii)(D)(V).

Position: Generally not.

Reasons: Such portion of the interest payments may only be relevant in computing the liability for income taxes of the payer foreign affiliate.

		99-000968
XXXXXXXXXX 	Olli Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX 

February 25, 2000

Dear Sirs:

Re: Clause 95(2)(a)(ii)(D)

This is in reply to your letter requesting our interpretation whether clause 95(2)(a)(ii)(D) of the Income Tax Act (the "Act") applies to interest paid by a foreign affiliate in the following circumstances.

1. Canco is a corporation resident in Canada.

2. FA1 is a wholly owned foreign affiliate of Canco.

3. FA1 has loaned funds to UK1 a wholly owned foreign affiliate of Canco resident in the United Kingdom.

4. UK1 used the funds borrowed from FA1 to acquire all the shares of UK2.

5. The shares of UK1 and UK2 are excluded property at all relevant times and both corporations have a December 31 taxation year end.

6. UK1 has no revenue but it pays interest of $10,000 in year 1 on its debt to FA1.

7. UK2 has net income from its active business operations in year 1 of $7,000.

8. In computing their income for tax purposes, UK1 surrenders $7,000 of the loss referred to in paragraph 6 above, to UK2 which uses the loss to reduce its taxable income for UK tax purposes to nil. UK1 and UK2 are the only UK affiliates of Canco.

9. Under UK tax law, the remaining $3,000 of the loss incurred by UK1 in year 1 is not able to be surrendered to UK2 because UK2 cannot use such portion of the loss in that taxation year. Under UK tax law, such remaining loss will be available for carry forward for use only by UK1 in future taxation years because a loss carry forward is not eligible for group relief. UK1 is unable to claim the loss carry forward in computing its UK tax liability in any taxation year.

You request our view whether all of the $10,000 of interest paid by UK1 will be included in income from an active business of FA1 pursuant to clause 95(2)(a)(ii)(D) of the Act.

Our Comments

It is our view that in the above circumstances, only $7,000 of the interest would be relevant in computing the liability for income taxes in that country of the members of a group of corporations for the purposes of subclause 95(2)(a)(ii)(D)(V) of the Act. Accordingly, only $7,000 of the interest would be included in the income from an active business of FA1. The remainder would remain income from property and be included in computing the foreign accrual property income of FA1.

Yours truly,

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

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