30 April 1999 Internal T.I. 9827317 - FAPI AND SUBSECTION 53(2.1)53(2.1)

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 Subsection 53(2.1) applies to a controlled foreign affilate and how does it file the election?

Position: Subsection 53(2.1) of the Act applies to a controlled foreign affiliate and it should file the election on or before the end of the taxation year of the Canadian parent company in which the taxation year of the foreign affiliate falls

Reasons: The controlled foreign affiliate is considered to be a taxpayer for the purposes of the Act, at least for the provisions involving the computation of income such as subsection 53(2.1) of the Act.

		April 30, 1999

	Vancouver Tax Services Office	International Section
S. Leung
Mr. Wayne Wou 	957-2115
	Section 446-33
	International Audit
		982731

FAPI and Subsection 53(2.1) of the Income Tax Act (the “Act”)

We are writing in reply to your memorandum of October 10, 1998 in which you requested our view as to how an election under subsection 53(2.1) of the Act is to be made by a person who is a controlled foreign affiliate (as defined in subsection 95(1) of the Act) of a Canadian corporation and whether an election made by such a person could be considered to be late filed.

In the situation outlined in the letter from your client, a wholly-owned foreign affiliate (“Foreignco”) of a Canadian corporation (“Canco”) received an inducement from an arm’s length party to purchase shares of a corporation. Foreignco only owns shares of other foreign corporations. The inducement so received by Foreignco is considered to be foreign accrual property income (“FAPI”) of Foreignco. As a result, Foreignco is required to include in computing its income under Part I of the Act the amount of the inducement pursuant to paragraph 12(1)(x) of the Act. However, under subsection 53(2.1) of the Act, a taxpayer who received an amount which would otherwise be included in the taxpayer’s income under paragraph 12(1)(x) of the Act may elect to reduce the cost of the capital property acquired. The amount of such reduction would be excluded in computing the income of the taxpayer under subparagraph 12(1)(x)(vii) of the Act.

Generally, in order for the election under subsection 53(2.1) of the Act to be valid, the Act requires that the taxpayer must file the election on or before the date on or before which the taxpayer’s return of income under Part I of the Act for the year is required to be filed. In this regard, it is our view that a foreign affiliate could be considered to be a taxpayer. The term “taxpayer” is defined under subsection 248(1) of the Act to include any person whether or not liable to pay tax. Furthermore, whenever provisions of the Act such as section 3 or section 9 refer to income, they refer to “income of a taxpayer”. Since a controlled foreign affiliate is required to compute income under Part I of the Act for FAPI purposes, it is considered to be a taxpayer for the purposes of the Act, at least for the provisions involving the computation of income such as subsection 53(2.1) of the Act.

Although paragraph 150(1)(a) of the Act can be read to require every corporation (including a foreign affiliate) to file a return of income within 6 months from the end of the taxation year of the corporation, generally, a foreign affiliate of a Canadian corporation does not need to file a Canadian tax return unless it has income earned in Canada as described in section 115 of the Act. This interpretation is supported by the recent comments from the Department of Finance in the Technical Notes regarding the proposed amendment to subsection 150(1) of the Act released on October, 1998. The Department of Finance stated therein that the proposed amendment is to clarify the filing obligations of corporations (Emphasis added). It seems to imply that the intent of paragraph 150(1)(a) of the Act before the proposed amendment is that corporations that do not fall in the categories listed in the proposed provisions of subparagraphs 150(1)(a) (i) and (ii) of the Act do not need to file a return of income.

Notwithstanding the above, in order for Canco not to include the FAPI of Foreignco in computing Canco’s income under subsection 91(1) of the Act for a particular taxation year, it is advisable for Foreignco to file the subsection 53(2.1) election for a taxation year on or before the end of the particular taxation year of Canco in which the taxation year of Foreignco falls. At the latest, the subsection 53(2.1) election should be filed by Foreignco before the normal reassessment period (as defined in subsection 152(3.1) of the Act) of Canco has expired.

The Act does not require that the election under subsection 53(2.1) of the Act be filed in prescribed form. The taxpayer who wishes to elect should send a letter to Revenue Canada containing the name of the taxpayer making the election, the fiscal year end of the taxpayer, the description of the capital property involved in the election, the date such property was acquired, and the information referred to in paragraphs (a) and (b) of subsection 53(2.1) of Act. In the event that the taxpayer is a controlled foreign affiliate of a person resident in Canada, the name of that person and his Revenue Canada’s account number should also be included.

If you have any question regarding the above, please do not hesitate to contact us.

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