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 95(6) could apply with respect to provisions of the Act not contained in subdvision i of Division B of Part 1 of the Act
Position: Yes
Reasons: For various reasons stated in the document
March 18, 1999
Keith Falkenberg International Section
International Tax Advisor, Prairie Region S. Leung
Calgary Tax Services Office 957-2115
990312
Subsection 95(6) of the Income Tax Act (the "Act")
We are writing in reply to your enquiry as to whether subsection 95(6) of the Act could apply with respect to provisions of the Act not contained in subdivision i of Division B of Part I of the Act, such as the provisions regarding the overseas employment tax credit (OETC), in view of the phrase "for the purposes of this subdivision (other than section 90)" used in the pre-amble of subsection 95(6) of the Act.
Taxpayers' Position
You mentioned that a taxpayer argued that subsection 95(6) would not apply with respect to provisions not contained in subdivision i of Division B of Part I of the Act because that subsection only applies for the purposes of subdivision i of Division B of Part I of the Act and subsection 122.3(1) is not under that subdivision. The taxpayer claimed that the overall purpose of subdivision i of Division B is to tax certain offshore passive income of a Canadian resident who earns such income through a foreign company or trust and the claim by the employees of a foreign affiliate of a Canadian resident corporation for the OETC would have nothing to do with this overall purpose of subdivision i of Division B. He maintained that subsection 95(6) would only apply for the overall purposes of subdivision i of Division B, not for the purpose of a segment of a particular provision (namely, the definition of "foreign affiliate" in subsection 95(1)).
Our Position
We do not agree with this interpretation. The term "foreign affiliate" used in the definition of "specified employer" in subsection 122.3(2) is not defined in section 122.3 but its meaning can be found in subsection 248(1) which is for the purposes of the Act. Under subsection 248(1), for the purposes of the Act, the term "foreign affiliate" has the meaning assigned by subsection 95(1). In other words, for the purposes of the definition of "specified employer" in subsection 122.3(2), one has to go to subsection 95(1) for the meaning of the term "foreign affiliate". Since subsection 95(6) applies for the purposes of subdivision i of Division B and since subsection 95(1) is part of subdivision i of Division B, subsection 95(6) should apply to the meaning of the term "foreign affiliate" described in subsection 95(1). Indeed, the effect of subsection 95(6) on the ownership, acquisition or disposition of shares of a company is to redetermine the foreign affiliate status of the company vis-à-vis the Canadian corporate shareholder where shares are acquired, issued or disposed of to permit a person to avoid, reduce or defer tax that would otherwise be payable under the Act. It is not just tax attributable to the amount included in income of that person under subdivision i of Division B or tax of the Canadian resident corporation to whom the shares in question were issued.
The term "foreign affiliate" is used in several provisions of the Act outside subdivision i of Division B that impact on the tax situation of a person under the Act. It would seem that if the intention was that paragraph 95(6)(b) apply only to situations involving foreign accrual property income (FAPI), the words in that paragraph would have been restricted to FAPI. If it could be said that because of the close relationship of section 113 and subdivision i of Division B, paragraph 95(6)(b) could apply for the purpose of section 113, then the words in that paragraph would clearly have to restrict its application to that section because section 113 is outside subdivision i of Division B. On the other hand, subdivision i of Division B deals with rules for the purposes of section 113, as much as it sets out rules for the purposes of FAPI. Taking into account the fact that paragraph 95(6)(b) refers to permitting a person (this could be any person) to avoid tax under the Act, it is not clear why that paragraph 95(6)(b) would not apply if shares of a foreign corporation were issued to take advantage of section 113. Say, for example, preferred shares of a foreign corporation were issued to a corporation resident in Canada so that corporation would be able to make a deduction under section 113 with respect to dividends paid to that corporation on the common shares of the foreign corporation and the holding in the common shares was not sufficient to create foreign affiliate status.
There are other relieving provisions in the Act that depend on foreign affiliate status, such as subsections 15(2.1) and 80.4(8). If foreign affiliate status for the purposes of the Act depends on the definition in subsection 95(1), it is not clear why paragraph 95(6)(b) would not apply where shares of a foreign corporation which was the parent of a corporation resident in Canada were issued to that Canadian corporation to take advantage of those relieving provisions. In such a case, the tax liability is the foreign parent's, not that of the Canadian corporation.
Therefore, if it can be established that the principal purpose of issuing shares by a non-resident corporation to a Canadian resident corporation was to permit Canadian resident employees of the non-resident corporation to take advantage of the tax credit provided by section 122.3, paragraph 95(6)(b) should apply for the purpose of that section.
In summary, our position is that where the purpose test therein is established, subsection 95(6) applies with respect to provisions of the Act not contained in subdivision i of Division B of Part I of the Act including subsection 122.3(1) of the Act. It is not necessary that the preamble of paragraph 95(6)(b) state that it applies for the purposes of the Act.
for Director
Reorganization and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
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