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.
QUESTION
Under certain circumstances where a foreign affiliate realizes a capital gain on the disposition of a property that is not excluded property, for the purpose of computing the surplus accounts of the affiliate, the taxable portion of the gain is included in taxable surplus and the balance is included in exempt surplus. Under subparagraph 5907(1)(1)(v) of the Regulations, the underlying foreign tax of a foreign affiliate includes "the portion of any income or profits tax paid to the government of a country by the affiliate that may reasonably be regarded as having been paid in respect of the taxable earnings of the affiliate ...". In situations where the affiliate is subject to foreign tax on the gain (which tax is usually computed on a different basis than in Canada), there is no clear indication of how the foreign tax on the gain is to be allocated to the taxable surplus. However, in some cases, where there could otherwise be a degree of double taxation, it would appear reasonable to allocate all of such foreign tax to the taxable surplus. What is Revenue Canada's position on this issue?
DEPARTMENT'S POSITION
No hard and fast rules can be set for the computation of "underlying foreign tax". Each case must be considered on its own facts having regard to the object of the provisions. It is the Department's view that foreign tax paid in respect of a capital gain may reasonably be regarded as having been paid in respect of taxable earnings to the extent that such foreign tax is required to eliminate the Canadian income tax that would otherwise be payable in respect of the gain under the FAPI rules or through the repatriation of the taxable surplus resulting from the gain. Any "excess" foreign tax paid in respect of the gain would be a deduction in computing exempt earnings.
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