Principal Issues: [TaxInterpretations translation] Which of a Canadian corporation that owns television program rights, or another Canadian corporation that acts as the bargaining agent for the first corporation in the sale of those rights abroad, can claim the foreign tax credit?
Position: The Canadian corporation that owns the television program rights.
Reasons: The corporation that owns the exploitation rights is the selling party. The other Canadian corporation acts only as the bargaining agent and is paid by the corporation holding the rights and not by the foreign third-party purchaser. Therefore, the tax cannot be that of the bargaining agent corporation, but rather of the corporation holding the rights.
XXXXXXXXXX 2010-035957 Nancy Turgeon, CGA August 13, 2010
Dear Sir,
Subject: Foreign tax credit
This responds to your fax of March 4, 2010, in which you requested our opinion as to which of the Canadian corporation that owns television program rights, or the corporation that acts as an agent in the sale of those rights outside Canada, can claim a foreign tax credit.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act "the Act".
The situation you indicated in your mailing appears to relate to an actual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, when determining whether a completed transaction has received proper tax treatment, that decision is made first by our Tax Services Offices after reviewing all the facts and documents, which is usually done in the course of an audit engagement. However, we would be pleased to provide the following general comments that may be of assistance to you. These comments, however, may not apply to your particular situation in certain circumstances.
You raised the situation of Corporation A that is a Canadian corporation which produces television programs for which it holds the rights of exploitation. In addition, Corporation B, which is also a Canadian corporation, acts as a sales agent abroad. It receives a commission as a percentage of the gross amount of each sale.
For its part, a French buyer withholds taxes at source and remits the net amount to Corporation B.
Corporation B, in turn, invoices Corporation A such that it remits to Corporation A only the net proceeds of the sale after deducting the commission and the foreign taxes withheld by the buyer, thus passing only the net amount along to Corporation A.
You wish to know which of Corporation A or Corporation B is entitled to claim the foreign tax credit in Schedule 21 to its corporate income tax return.
Our Comments
The foreign tax credit is provided under subsections 126(1) and 126(2). Although they are similar, they address two distinct types of income: foreign non-business income; and foreign business income. In this situation, based on the elements you presented, it appears that they may be "royalties", i.e., non-business income, to which subsection 126(1) applies. We have used this assumption in our interpretation.
Furthermore, it will usually be accepted in such situations that the selling party is Corporation A since it is Corporation A which actually assigns the rights to exploit television programs to a third party. Corporation B appears to be involved in the transaction only as a bargaining agent between the selling party and the French acquiring party. Corporation B is remunerated for its services as agent by Corporation A and does not transfer anything to the French third party, which is not liable for any remuneration or compensation. It is therefore not possible to levy any foreign tax.
Generally, the only foreign tax withheld, in a similar situation, is on the amount of the sale between the selling party and the acquiring party, which amount is merely passed through the hands of the bargaining agent, and is a non-business-income tax as defined in subsection 126(7).
We are therefore of the view that, in this example, it is the selling party, Corporation A, that paid non-business-income tax to the government of a country other than Canada for the purposes of paragraph 126(1)(a), which can, therefore, compute a foreign tax credit under subsection 126(1).
These opinions are not advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on us.
Best regards,
Alain Godin
Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.