27 April 1995 External T.I. 9510435 - CDN CORP TREATED AS P-SHIP IN U.S. (FTC ISSUES)

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:

Canadian corporation ("subsidiary") carries on business in the U.S but is considered a partnership for U.S. tax purposes. Accordingly, partners (i.e. another Canadian corporation ("parent")) are subject to U.S. tax. How does foreign tax credit work?

Position TAKEN:

No foreign tax credit under subsection 126(2) of the Act.

Reasons FOR POSITION TAKEN:

With respect to the subsidiary, it did not have a U.S. tax liability and therefore it did not pay an "income or profits tax". With respect to the parent, its U.S. tax liability was not in respect of a business carried on by it in the U.S.

		951043
XXXXXXXXXX	Jim Wilson
(613) 957-8953

Attention: XXXXXXXXXX

April 27, 1995

Dear Sirs:

This is in reply to your letter dated April 13, 1994, in which you requested our comments concerning subsections 15(1) and 126(2) of the Income Tax Act (the "Act") in the following situation:

Situation

1.Canco is a corporation incorporated under the Canada Business Corporations Act. Canco owns 60% of the shares of Opco.

2.Opco is an unlimited liability company incorporated under the Nova Scotia Companies Act.

3.Opco carries on an active business in the United States through a permanent establishment.

4.Opco is treated as a partnership for United States tax purposes. Opco, therefore, must compute its income for U.S. tax purposes and allocate this income to the partners (shareholders). Canco is, therefore, allocated 60% of Opco's income for U.S. tax purposes.

5.Canco is, therefore, a taxpayer for U.S. tax purposes. Canco must file a U.S. income tax return in which it reports its share of Opco's U.S. income. Canco thus pays U.S. income taxes in respect of U.S. operations.

6.Opco will write the cheque to the Internal Revenue Service in payment of the United States taxes levied on Canco.

You have specifically requested confirmation that the amount paid by Opco in respect of U.S. taxes will constitute a "business-income tax", as that term is defined in subsection 126(7) of the Act, to Opco and that such "business-income tax" will qualify in determining the amount deductible by Opco under subsection 126(2) of the Act. You have also requested confirmation that the U.S. taxes paid by Opco on behalf of Canco will not constitute a benefit to Canco pursuant to subsection 15(1) of the Act.

Our Comments

The situation described in your letter would appear to involve an actual proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. However, we can offer the following general comments which we hope will be of assistance to you.

An incorporated company created under the Nova Scotia Companies Act, notwithstanding that its shareholders have unlimited liability for the debts of the company, is a corporation within the meaning of section 248 of the Act. Accordingly, for Canadian tax purposes, Opco would be considered taxable in respect of the business carried on by it in the United States.

The criteria used by the Department to determine eligibility for the foreign tax credit are summarized in Interpretation Bulletin IT-270R2 (the "bulletin") dated February 11, 1991. Paragraph 16 of the bulletin states that "The payment of an amount of foreign tax by an agent on behalf of a Canadian resident taxpayer is equivalent to payment by the taxpayer". Regardless of whether a principal\agent relationship existed between Canco and Opco, any income or profits tax that would be considered to have been paid by Canco would not qualify as a "business-income tax", as that term is defined in subsection 126(7) of the Act, because it cannot "reasonably be regarded as tax in respect of the income of the taxpayer from any business carried on by the taxpayer in the business country". Accordingly, Canco would not be entitled to a foreign tax credit under subsection 126(2) of the Act.

Since Opco does not have any liability for U.S. taxes, any amount paid by Opco with respect to Canco's U.S. tax liability is not a tax of Opco and would not constitute an "income or profits tax paid by" Opco for purpose of the definitions of "business-income tax" and "non-business income tax" in subsection 126(7) of the Act. Accordingly, Opco would not be entitled to claim a foreign tax credit under subsection 126(1) or (2) of the Act nor would it be entitled to a deduction under subsection 20(12) of the Act with respect to Canco's U.S. tax liability.

Where the U.S. tax paid by Opco on behalf of Canco, whether or not a principal/agent relationship existed, was not reimbursed to Opco by Canco, we believe that a benefit under subsection 15(1) of the Act will arise.

The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 21 of the aforementioned Information Circular this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch