Business in multiple countries (p. 43:6)
If a foreign affiliate carries on a business in multiple countries, the earnings definition may not adequately resolve the appropriate tax system to use in computing earnings. Assume that a Canadian corporate taxpayer purchased FA 1 in 1972. FA 1 carries on an active business, is a resident of country A, and is required by law to file income tax returns there. In that same year, FA 1 purchased a foreign resource property in country B. By virtue of the active business income generated from that resource property, FA 1 is considered to carry on a business in country B and is required to file income tax returns there as well....A technical reading of the earnings definition requires FA 1 to compute its income from its active business for the year in accordance with the income tax law of country A, but this result is not logical.
S. 95(2)(a) income (p. 45:7)
"Income from property" is a defined term in the Act. Therefore, income from property deemed to be income from an acive business by virtue of paragraph 95(2)(a) would be computed generally by following the rules in Part I of the Act. Difficulties may arise when applying Canadian rules to foreign affiliates under other tax regimes. [After discussing captive insurance company example:] The real difficulty is in computing the income under Canadian rules, because certain amounts, such as the claims and premium reserves, may be difficult to determine.
The underlying principle of the regulation 5907(2) adjustments is to determine the amount of assets available to repatriate surplus. Permanent non-deductible expenses, such as the disallowed portion of meals and entertainment, illustrate this principle....
The deduction of amounts in excess of the actual expense artificially reduces earnings, and the taxpayer will want to increase exempt surplus by the additional amount. For example, Thailand and Singapore provide deductions in excess of actual expenses. Thailand offers tax relief for certain manufacturing companies in the form of a second deduction of its utility expenses, while Singapore allows certain capital assets to be depreciated to 150 percent of their original cost.
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