Principal Issues: Whether a change to the fiscal period of a foreign affiliate will be recognized where the foreign affiliate continues into a new jurisdiction
Position: Only if a change in fiscal period is required by the laws in the new jurisdiction.
Reasons: The taxation year of a foreign affiliate is determined in accordance with the taxation year used for purposes of computing income in the country in which the foreign affiliate is resident.
2005-016513 XXXXXXXXXX A. Seidel, CMA (613) 957-2058 January 28, 2008
Dear XXXXXXXXXX:
Re: Taxation Year of Foreign Affiliate
This is in response to your December 23, 2005 letter in which you requested our comments regarding the recognition, for purposes of the Income Tax Act (the "Act"), of a change in the fiscal period of a controlled foreign affiliate of a Canadian resident trust in the hypothetical situation described below. We apologize for the delay in our reply.
A Canadian resident trust owns all of the issued and outstanding shares of a corporation ("FA") that is resident in a tax haven. The tax haven does not impose income tax but FA is subject to accounting principles in the tax haven that govern the computation of its income. FA does not carry on any business in Canada. FA currently has a December 31 taxation year-end for the purposes of section 95 of the Act. FA proposes to continue into another foreign jurisdiction on January 31 and will be required by the relevant accounting principles in the tax haven country to have a fiscal year-end on January 31.
Issue
Subsequent to its continuance into the foreign jurisdiction, will the CRA recognize January 31 as the new taxation year-end of the FA for the purpose of section 95 of the Act?
Our Comments
The situation outlined in your letter appears to relate to a situation involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
Subsection 95(1) of the Act defines "taxation year", in relation to a foreign affiliate of a taxpayer, to mean the period for which the accounts of the foreign affiliate have been ordinarily made up. Paragraph 250.1(a) of the Act provides that, for greater certainty, unless the context requires otherwise, the taxation year of a non-resident person shall be determined, except as otherwise permitted by the Minister, in the same manner as the taxation year of a person resident in Canada. In addition, subsection 249.1(3) of the Act provides that where the fiscal period of a business ends at any time, the subsequent fiscal period of the business is deemed to begin immediately after that time.
Subject to certain exceptions, we are of the view that the taxation year of a foreign affiliate, for the purposes of computing the foreign affiliate's foreign accrual property income and surplus accounts, is to be determined in accordance with the taxation year that the foreign affiliate uses for income tax reporting purposes in the country in which the foreign affiliate is resident. In addition, we have taken the position that the concurrence of the Minister is not required to a change of fiscal period that is mandated by the reporting requirements of a foreign jurisdiction.
In the situation described in your letter, we agree that, in the absence of an income tax-reporting requirement in the tax haven jurisdiction, the taxation year of the FA would be the period for which the accounts of the FA are prepared under the relevant accounting principles of the country. If, as a result of the continuance of the FA into a new jurisdiction, those accounting principles mandate a fiscal year-end on January 31 (date of continuance), we would consider the fiscal year of the FA to end at that time and a new fiscal period to begin immediately after that time. On a going forward basis, the fiscal period of the business will be governed by the reporting requirements in the new foreign jurisdiction.
Yours truly,
Daryl Boychuk
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch