14 April 1983 Income Tax Severed Letter 5-1787C

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.

We reply to your recent referral of the above subject.

You have requested our opinion on the determination of the foreign accrual tax applicable to foreign accrual property income (FAPI) of a foreign affiliate which is a member of a group filing a consolidated tax return where the consolidated position of the group for the year is a loss and no taxes were paid for the year.

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With respect to U.S. consolidated returns, we have taken the position that:

• a) a principal-agency relationship exists between the member responsible for filing returns and remitting tax for the group and the other members of the group;
• b) only the pro-rata share of the total tax paid by the group qualifies as an income or profits tax of each member of the group to the extent paid by the member; and
• c) where there is compensation within the group for the benefit derived from another member1s loss both the payment and receipt are regarded are on account of capital and do not qualify as an income or profits tax.

Naturally Regulation 5907(1.1) to (1.3) will apply after 1981 if those provisions become effective.

You have also requested our opinion on the determination of the foreign accrual tax applicable to an affiliates taxable capital gains for the purpose of 95(1)(b)(ii) when under the legislation of the foreign jurisdiction the affiliate is taxed on the entire capital gain at a reduced rate of tax. As a result of our consideration of this matter we have taken the following position:

• a) where only part of the gain is included in income all of the tax is regarded as applicable to the FAPI gain unless more than 50% of the gain is included in income in which case only the tax relative to 50% of the gain is regarded as applicable to the FAPI gain;
• b) where the full gain is included in income and only taxed at special rates all of the tax is regarded as applicable to the FAPI gain subject to a maximum of 50% of the top, marginal rate; and
• c) where the full gain is included in income and taxed at full rates only a pro-rata portion of the tax is regarded as applicable to the FAPI gain.

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We trust the foregoing is satisfactory and we regret the small delay in our reply.