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.
Dear Sirs:
This is in response to your letter dated January 6, 1988 in which you requested a technical interpretation regarding the application of paragraph 95(2)(a) to the following hypothetical situation:
- 1. A controlled foreign affiliate (Company A) of a Canadian resident corporation (Canco) carries on an active business in Country A (with which Canada has a tax treaty);
- 2. Company A pays interest on borrowed funds used in carrying on its active business to another controlled foreign affiliate of Canco, Company 2 resident in Country B (with which Canada has a tax treaty);
- 3. Company B pays interest on funds borrowed for the purposes of making loans to Company A at a higher interest rate to another controlled foreign affiliate of Canco, Company C resident in Country C (with which Canada has a tax treaty);
- 4. Company A realizes net profits in some fiscal period's and net losses in some fiscal periods, determined in accordance with the tax laws on the basis that it files its income tax returns in Country A.
The issue in respect of which our opinion is requested is whether or not the interest income of Company C would be considered to be "foreign accrual property income" in its fiscal periods coinciding with the fiscal periods of Company A in which Company A has net losses for tax purposes under the rules of Country A.
We provide the following general comments.
Provided the interest paid or payable by Company A to Company B is deductible in the computation of Company A's income or loss from an active business, other than an active business carried on by it in Canada, it is our view such interest would be included in the computation of Company B's income from an active business pursuant to subparagraph 95(2)(a)(ii).
Regulation 5907(1)(a)(ii) would include the interest paid by Company A to Company B, net of related expenses, in the earnings from an active business of Company B, which then would result in the interest paid by Company B to Company C being considered deductible in determining the earnings from an active business of Company B. Consequently, paragraph 95(2)(a) would include the interest received from Company B by Company C in the computation of Company C's income from an active business. Such interest income would therefore not be considered "foreign, accrual property income" to Company C.
We hope these comments are of assistance.
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