Principal Issues: When subsection 75(2) of the Act applies to shares of a foreign corporation held by a trust that is taxable under paragraph 94(1)(c) of the Act, how does one determine the amount to be attributed to the contributor? In particular, can the amount of income that was attributed to the contributor be changed if the foreign corporation realizes a loss in a subsequent year?
Position: The income or loss from property, or taxable capital gains or allowable capital losses from the disposition of property are to be computed in accordance with Division B of Part I of the Act; thus section 91 is the appropriate taxing provision for the contributor when subsection 75(2) applies. The calculation under 94(1)(c)(i)(C) is not appropriate because 94(1)(c)(i)(C) is a component of the trust's total taxable income and does not necessarily reflect the net income from any particular property. If the Trust realizes a loss as computed under regulation 5903, the loss can be applied by the contributor in the other years, as permitted by regulation 5903 provided that 75(2) applies in the loss year.
2006 STEP Round Table
Q14. Attribution of FAPI under Subsection 75(2)
When subsection 75(2) of the Act applies to shares of a foreign corporation held by a trust that is taxable under paragraph 94(1)(c) of the Act, how does one determine the amount to be attributed to the contributor? In particular, can the amount of income that was attributed to the contributor be changed if the foreign corporation realizes a loss in a subsequent year?
Response
With respect to the computation of the amount to be attributed to a taxpayer under subsection 75(2) of the Act, the income or loss from property, or taxable capital gains or allowable capital losses from the disposition of property are to be computed in accordance with Division B of Part I of the Act. When the property in question is shares of controlled foreign affiliate held by a trust resident in Canada (including a trust that is deemed to be resident in Canada), the income to be attributed to the Canadian resident is the amount of any dividends received on the shares and any amount determined under section 91 in respect of those shares.
With respect to losses realized by the foreign corporation in other years, there is a proposal to amend section 5903 of the Regulations to allow a deductible loss of a particular controlled foreign affiliate of a taxpayer as computed under section 5903 of the Regulations to be applied to reduce the amount of FAPI included in the taxpayer's income for one or more of the three preceding years or any of the seven subsequent years. Provided that the amendment to the Regulation is enacted in substantially the same form as that released by the Department of Finance on March 16, 2001, a taxpayer will be able to claim such portion of the deductible loss of the controlled foreign affiliate of that taxpayer as is determined by section 5903 of the Regulations to reduce the amount included in income as FAPI in any of the three previous years immediately preceding the loss year as well as in any seven of the years subsequent to the loss year.
When a controlled foreign affiliate of a trust realizes a loss in a particular taxation year and that trust holds property under one of the conditions described in subsection 75(2) of the Act, the issue arises as to which taxpayer, the trust or the person to whom the income was attributed, is entitled to claim the deductible loss and what mechanism ensures that the amount of the deductible loss available for any other taxation year is reduced appropriately. A deductible loss, as computed under the proposed amendment to section 5903 of the Regulations, will be deductible by the trust to the extent that it reduces the computation of FAPI included in the trust's income for another year, except to the extent that such income was attributed to the person who transferred the shares to the trust under subsection 75(2) of the Act. Where that income was attributed to another taxpayer, the taxpayer who has included an amount of FAPI from a particular controlled foreign affiliate in that other taxation year by reason of the application of subsection 75(2) of the Act would be able to claim such portion of the deductible loss as determined by section 5903 of the Regulations in order to reduce the amount included in income in that other taxation year, provided that the conditions in subsection 75(2) of the Act are met in respect of the loss year.
Under the proposed amendments to section 5903 of the Regulations, the amount so claimed will reduce the amount of deductible loss available to be claimed by either the trust or the taxpayer in any other taxation year.