6 March 1991 Administrative Letter 901876 F - Foreign Accrual Property Income

Attention:  David Burton

Subject: Paragraph 95(1)(c) of the Income Tax Act ("Act") Subsection 5907(1.3) of the Regulations to the Act ("Regulations")

24(1)

This is in response to your memorandum of August 20, 1990 wherein you request our interpretation of the application of the above provisions to an actual case scenario involving the above corporations.  The facts you have described are as follows.

24(1)

We concur with your interpretation with respect to the amount paid by 24(1) However, it is our view that the words of subsection 5907(1.3) of the Regulations and paragraph 95(1)(c) of the Act are broad enough in certain circumstances to include an amount paid in a previous year. Paragraph 5907(1.3)(a) of the Regulations refers to "any amount paid... to the extent that it may reasonably be regarded as being in respect of income or profits tax that would otherwise have been payable by the particular affiliate in respect of a particular amount include in computing the taxpayer's income by virtue of subsection 91(1) of the Act for a taxation year in respect of the particular affiliate..."  The amount paid need only be in respect of the amount included in income by taxpayer in the taxation year. It need not be paid in any particular taxation year of the affiliate.

A payment made in any previous year of the foreign affiliate that at the time might have been paid in respect of active business income may retrospectively be reasonably considered to be in respect of an amount included in computing a taxpayer's income by virtue of subsection 91(1) of the Act in a later year in a situation where the foreign tax law provides for the carry-back of tax losses and the affiliate has incurred both an active business loss and FAPI income in the later year.  If the FAPI income either reduces or eliminates the active business loss that would otherwise be permitted under the foreign tax law, to be carried back to a previous taxation year and applied against the active business income that had been subject to tax in that previous year, a proportionate amount of the taxes paid (intercompany payments in the case of a consolidated group) in the previous year on such active business income could in our view reasonably be regarded to be in respect of the FAPI amount of the later year.  The argument would be that the total amount paid in respect of income taxes in the period was in excess of the amount of taxes that would have been paid on the net active business income for the period and therefore, the excess relates to the FAPI.

24(1)

Other Comments

We do not accept the taxpayer's contention that their interpretation is consistent with the spirit and intent of the FAPI provisions taken as a whole.  In our view, subsections 5907(1.1) and (1.3) of the Regulations were intended, for the purposes of the foreign affiliate Regulations and paragraph 95(1)(c) of the Act, to create the fiction that the foreign affiliates had not filed in the United States on a consolidated basis.  The taxpayer's interpretation is not in harmony, with this intention because it requires one to consider the

24(1)

The memorandum from the Toronto District Office indicates that 24(1) This method for calculation of FAPI is not accordance with paragraph 95(2)(f) of the Act which requires such gains to be calculated in Canadian currency.  That is, in calculating the gain, the adjusted cost base would have to be converted to Canadian funds at the historical rate of exchange while the proceeds of disposition would be converted at the current rate of exchange at the date of the disposition.  The two methods could produce significatly different results.

In addition, we would question whether city taxes would be considered income on profits taxes and therefore whether an amount in respect of city taxes would be deductible under subsection 91(4) of the Act.

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