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 Michigan Single Business Tax is creditable
Position: No. However, it is deductible under paragraph 18(1)(a) of the Act
Reasons: Because it is not an income or profit tax for the purposes of section 126 of the Act
XXXXXXXXXX 1999-001511
S. Leung
Attention: XXXXXXXXXX
October 24, 2000
Dear Sirs:
Re: Michigan Single Business Tax ("Michigan SBT")
We are writing in response to your letter of December 21, 1999 in which you requested our opinion as to whether Michigan SBT is creditable for Canadian tax purposes.
It is our understanding that the State of Michigan has amended its Single Business Tax Act to extend the tax to foreign entities with nexus in Michigan even if they do not have a permanent establishment in that State. The tax rate for 1999 is 2.2% of the adjusted tax base. This rate will be reduced by 0.1% each year if certain economic conditions are met within the State. The tax base is determined not on profit alone but on labour, capital and profit. Labour is measured by the compensation and benefits an employer pays to its employees; capital used is measured by depreciation, interest, dividends and royalties paid by the taxpayer; and profit is measured by the taxpayer's federal taxable income as adjusted for Michigan SBT purposes. Property income such as dividend, interest and royalty income is then subtracted from such tax base. The adjusted tax base is apportioned using a three factor apportionment formula with the sales factor having a 90% weighting and the payroll and property factors each having a 5% weighting. For a foreign entity, the sales, payroll and property factors will include Michigan activity in the numerator as compared to U.S. activity (not world-wide activity) in the denominator.
It is our understanding that a foreign entity will be subject to Michigan SBT even though it has no income or it is exempt from federal income tax under the Internal Revenue Code. In our view, Michigan SBT is not an income or profit tax1 for the purposes of section 126 of the Income Tax Act (the "Act") and is therefore not creditable for Canadian foreign tax credit purposes. However, it is deductible as a business expense in computing income of the taxpayer under paragraph 18(1)(a) of the Act.
As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
ENDNOTES
1 In a pamphlet published by Michigan Department of Treasury titled "What is Single Business Tax?", it is stated that "the SBT replaced net income-based taxation with value-added taxation".
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