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 a foreign affiliate (FAB) was a member of the group for the purposes of subclause 95(2)(a)(ii)(D)(V) as of result of its income being included in the income of another affiliate (FAA) under Subpart F of the U.S. Internal Revenue Code (the "Code") which are similar to Canada's FAPI rules.
Position: No
Reasons: Subclause 95(2)(a)(ii)(D)(V) refers to "computing the liability for income taxes of the members of the group". Notwithstanding that Subpart F of the Code requires the inclusion of the income of FAB in the income of FAA, the computation nevertheless involves the computation of the income tax liability of only FAA. The income tax liability of the FAB is unaffected by the application of Subpart F of the Code.
XXXXXXXXXX 1999-000972
Olli Laurikainen
Attention: XXXXXXXXXX
November 1, 2000
Dear Sirs:
Re: Clause 95(2)(a)(ii)(D) and Subparagraph 95(2)(a)(i) of the Income Tax Act (the "Act")
This is in reply to your letter requesting our views concerning the application of the above provisions of the Act. You provide the following hypothetical fact scenarios.
Scenario A
1. Canco is a corporation resident in Canada.
2. Holdco and Finco are both wholly-owned foreign affiliates of Canco.
3. Finco makes a loan to Holdco. All of the funds from the loan are used by Holdco to purchase all of the shares of a non-resident corporation ("Opco"). The interest paid on the loan satisfies the conditions set out in subclauses 95(2)(a)(ii)(D)(I) and (II) of the Act.
4. Holdco and Opco are US corporations resident in the United States.
5. Opco carries on an active business in the United States and all of its assets, except for the shares of Subco A and Subco B described below, are used in its active business.
6. Subco A, a wholly-owned subsidiary of Opco, is a corporation incorporated in a jurisdiction other than United States or Canada. The income of Subco A is included in a US consolidated filing with Opco and Holdco because of an election made under Section 953(d) of the Internal Revenue Code (the "Code"). This election treats Subco A as a domestic corporation for US tax purposes, and therefore, Subco A is part of the US consolidated group. Under common law principles, Subco A is resident in the United States.
7. Subco B, a wholly-owned subsidiary of Opco, is a corporation incorporated in a jurisdiction other than the United States or Canada. Subco B is not part of the US consolidated filing but all of its income is included in the US consolidated return by virtue of Subpart F of the Code.
8. The shares of Holdco, Opco and Subco A are "excluded property" for purposes of the definition in subsection 95(1) of the Act. The shares of Subco B are not excluded property. The cost and fair market value of the shares of Subco B vis-à-vis the cost and fair market value of Opco's other assets, is such that all or substantially all of Opco's assets are excluded property.
You request our views on the application of clause 95(2)(a)(ii)(D) to the interest paid by Holdco.
Scenario B
1. A taxable Canadian corporation ("Canco") owns 100% of the shares of a foreign affiliate incorporated and resident in a foreign country ("Holdco").
2. Holdco owns 100% of the shares of second foreign affiliate of Canco incorporated and resident in a foreign country ("Subco A").
3. Subco A owns 100% of the shares of third foreign affiliate of Canco incorporated and resident in a foreign country ("Subco B").
4. Subco A carries on an active insurance business in the foreign jurisdiction and all of its assets (other than shares of Subco B) are used in an "active business" as that term is defined in subsection 95(1) of the Act. It does not have any cash in excess of that required to meet its minimum capital requirements for regulatory purposes.
5. Some of the investments (i.e. investments in treasury bills or other like instruments) required to meet the minimum capital requirements of Subco A are held in Subco B. The removal of any portion of these investments would have a destabilizing effect on Subco A since it would not meet regulatory and licensing requirements. On this basis, Subco B's income would be deemed to be active under subparagraph 95(2)(a)(i) of the Act.
You request our view whether the shares of Subco B would be excluded property as that term is defined in subsection 95(1) of the Act.
Scenario A
The interest paid by Holdco in scenario A satisfies clause 95(2)(a)(ii)(D) and would be included in Finco's income from an active business. Subclauses 95(2)(a)(ii)(D)(I)-(IV) are clearly satisfied. In addition, it would appear that for the purposes of subclause 95(2)(a)(ii)(D)(V) Subco A would be a member of the group of corporations while Subco B would not be a member. This is so because all the income and losses of Holdco, Opco and Subco A must be included in the income of the consolidated group filing a consolidated return and the interest paid by Holdco is relevant in computing the income tax liability of that group under the Code. Subco B would not be considered a member of the group because its liability for income taxes in the United States, if any, is unaffected by the group filing. Its income becomes the income Opco by virtue of the operation of the provisions of Subpart F of the Code but Opco not Subco B is liable for income taxes in the United States in respect of that income. As Subco B would not be considered a member of the group for the purposes of subclause 95(2)(a)(ii)(D)(V), the fact that its shares were not excluded property would not cause the interest paid by Holdco to fail to qualify under clause 95(2)(a)(ii)(D) of the Act.
In the event that Subco A was resident in a country other than the United States under common law principles, the "group" referred to in subclause 95(2)(a)(ii)(D)(V) would have members resident in more than one country. Accordingly the provisions of that sub-clause would not be satisfied and the interest would not qualify under clause 95(2)(a)(ii)(D) of the Act.
Scenario B
In our view the shares of Subco B would be excluded property as that term is defined in subsection 95(1) of the Act provided all or substantially all of its assets are used or held by it principally for the purpose of gaining or producing income which by virtue of the application of subparagraph 95(2)(a)(i) of the Act is income from an active business.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000
Email this Content