The FAT [foreign accrual tax] or UFT [underlying foreign tax] denied under the FTCG [foreign tax credit generator] Rules is not limited to the amount of foreign income or profits taxes paid in respect of FAPI [foreign accrual property income]. In certain circumstances, the FTCG Rules could deny credit for Canadian taxes paid. FAT and UFT include income or profits tax paid by a foreign affiliate to the government of any country, including Canada. [fn. 11: See the definitions of "foreign accrual tax" in subsection 95(1) of the Act and "underlying foreign tax" in subsection 5907(1) of the Regulations, as well as Canada Revenue Agency Documents 2000-0058637 (February 5, 2002) and Canada Revenue Agency Document 2007-0247551E5 (June 27, 2008).] For example, consider a situation in which a foreign affiliate lends money to a related Canadian resident. The interest paid to the affiliate is subject to Canadian non-resident withholding tax at a rate of 25%. Absent the FTCG Rules, this withholding tax borne by the foreign affiliate should generally be included in the affiliate's FAT and UFT. However, if the FTCG Rules apply to a taxpayer in respect of the affiliate, this withholding tax will be ignored in computing the taxpayer's FAT and UFT deductions, even though it represents actual Canadian taxes paid.
After referring to the expansion of the income test in s. 91(4.1)(a) by virtue of the deductible dividend test in s. 91(4.7), they stated:
… On this basis, the income test could apply to investments that may not be considered hybrid instruments in the conventional sense. For example, dividends paid on certain Australian preferred shares are deductible by the payer, but are still considered dividends for some Australian tax purposes. These types of investments appear to be the subject of the income test addition to the FTCG Rules.
The income test refers to dividends or similar amounts that are treated as "interest or another form of deductible payment" under the relevant foreign tax law. It is not clear whether this rule applies only when amounts are actually paid and deducted, or if it applies whenever an entity has the ability to make deductible distributions in respect of shares.…
For example, Brazilian law allows incorporated companies to pay pro rata distributions referred to as "interest on equity." These distributions generally are deductible under Brazilian tax law, up to a maximum amount based on the company's "equity" and certain prescribed interest rates. These payments are deductible when declared, but a company can choose not to claim the deduction. Based on the words, the income test could apply when a Brazilian company makes an interest on equity payment, even if it chooses not to deduct this payment.
Email this Content