21 February 2001 Internal T.I. 2000-0053697 - Successored FEDE claims

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Can a corporation include the proceeds from the sale of successored foreign property in the calculation of its unsuccessored FEDE deduction under subsection 66(4).

Position: Yes.

Reasons: The income referred to in subparagraph 66(4)(b)(ii) does not distinguish between successored and unsuccessored income. In particular, clause 66(4)(b)(ii)(C) refers to the total of amounts each of which is an amount in respect of a foreign resource property that has been disposed of by the taxpayer. The December 21, 2000 proposed changes to 66(4)(b)(ii)(C) clarify how the deduction determined under subsection 66.7(2) is to be allocated to income for purposes of subparagraph 66(4)(b)(ii).

		February 21, 2001
	Large Business Audit Division
	Industry Specialist Services	HEADQUARTERS
	Bob Neville	Reorganizations and
	Co-ordinator, Resource Industries	   Resources Division
		David Shugar
		957-2134
	Attention: Zul Ladak
	Oil and Gas Specialist
	2000-005369

Successored and unsuccessored FEDE claims

This is in reply to your correspondence of October 31, 2000, regarding Foreign Exploration and Development Expenses (FEDE). You requested our views regarding whether a corporation can include the proceeds from the sale of successored foreign resource property (FRP) for purposes of claiming unsuccessored FEDE. All references are to the Income Tax Act unless otherwise indicated.

Our understanding of the facts you presented is as follows:

XXXXXXXXXX.

Our Comments

The successor deduction in respect of FEDE is limited to income from the disposition or production of FRP acquired by the successor in a transaction to which the successor rules apply. Aco acquired control of Bco on XXXXXXXXXX, causing the successor corporation provisions in section 66.7 to apply at that time with respect to Bco's FEDE balance. In this particular situation, on the amalgamation of Aco and Bco on XXXXXXXXXX, subsection 66.7(6) prevents the successor rules from being "reapplied" at that time because Bco was a wholly-owned subsidiary of Aco.

In order to determine the portion of Bco's successored FEDE pool, which ABco may deduct in computing its income for the year, it is necessary to determine, for purposes of subparagraph 66.7(2)(b)(i), the part of ABco's income for the year that may reasonably be regarded as attributable to successored FRP. Income for the purpose of subparagraph 66.7(2)(b)(i) is computed as if no deductions were allowed under sections 65 to 66.5, and 66.7. Based on the information provided for the XXXXXXXXXX taxation year, $XXXXXXXXXX is the successored income under subparagraph 66.7(2)(b)(i), of which $XXXXXXXXXX is the amount determined under clause 66.7(2)(b)(i)(A), and $XXXXXXXXXX is the amount determined under clause 66.7(2)(b)(i)(B). ABco claimed $XXXXXXXXXX from its successored FEDE pool, in respect of the successored income.

Provided ABco was resident in Canada throughout the relevant taxation year, a deduction with respect to its unsuccessored FEDE pool may also be calculated under subsection 66(4). One of the limits that determines the FEDE deduction available is the taxpayer's income determined under subparagraph 66(4)(b)(ii). Clause 66(4)(b)(ii)(A) refers to "such part of the taxpayer's income for the taxation year as may reasonably be regarded as attributable to the production of petroleum ... outside Canada." Clause 66(4)(b)(ii)(C) refers to "the total of amounts, each of which is an amount in respect of a FRP that has been disposed of by the taxpayer, equal to the amount, if any, by which the amount included in computing the taxpayer's income for the year by virtue of section 59 in respect of the disposition of the property exceeds the amount deducted under section 64 ... ." The wording of clause 66(4)(b)(ii)(C) does not distinguish between successored or unsuccessored property. Therefore, based on the current wording of the clause, the proceeds from the sale of a successored foreign property, for purposes of claiming unsuccessored FEDE, is required to be included in the calculation of income under clause 66(4)(b)(ii)(C). The postamble to subparagraph 66(4)(b)(ii) states that income under subparagraph 66(4)(b)(ii) is determined as if no deductions were allowed under subsections 66(1), (3), and (4), section 65, and subsections 66.1(2) and (3). Since section 66.7 is not referred to in the postamble, the deduction of $XXXXXXXXXX determined under subsection 66.7(2) would be deducted in computing the taxpayer's income for purposes of subparagraph 66(4)(b)(ii), giving an amount of $XXXXXXXXXX for purposes of subparagraph 66(4)(b)(ii). Therefore, the FEDE deduction calculated in subsection 66(4) is based on the successored income, to the extent it exceeds the deduction determined under subsection 66.7(2).

The legislative proposals of December 21, 2000, propose to change clause 66(4)(b)(ii)(C) as follows:

(C) all amounts each of which is an amount, in respect of a foreign resource property that
has been disposed of by the taxpayer, equal to the amount, if any, by which

(I) the amount included in computing the taxpayer's income for the year by reason of subsection 59(1) in respect of the disposition
exceeds

(II) the total of all amounts each of which is that portion of an amount deducted under subsection 66.7(2) in computing the taxpayer's income for the year that

1. can reasonably be considered to be in respect of the foreign resource property, and

2. cannot reasonably be considered to have reduced the amount otherwise determined under clause (A) or (B) in respect of the taxpayer for the year.

The proposed change clarifies that deductions claimed by a taxpayer under subsection 66.7(2) will always result in a reduction of the taxpayer's foreign resource income determined under subparagraph 66(4)(b)(ii). The proposed change now provides an ordering mechanism, in the proposed subclauses, by which the subsection 66.7(2) deduction can be allocated to a particular source of income. In the situation at hand, the FEDE claimed under subsection 66.7(2) was less than both the proceeds from the sale of property and the income from production. Based on the wording of the proposed subclauses, and in the absence of evidence to the contrary, the entire amount deducted under subsection 66.7(2) in computing the taxpayer's income can reasonably be considered to have reduced the amount otherwise determined under clause 66(4)(b)(ii)(A). In our view, the amount under proposed clause 66(4)(b)(ii)(A) would be $XXXXXXXXXX and the amount under proposed clause 66(4)(b)(ii)(A) would be $XXXXXXXXXX.

XXXXXXXXXX As stated above, ABco's successored income is $XXXXXXXXXX, which is comprised of income from two sources-proceeds from the sale of property, of $XXXXXXXXXX, under clause 66.7(2)(b)(i)(A), and income from production, of $XXXXXXXXXX, under clause 66.7(2)(b)(i)(B). The FEDE deduction is calculated as the lesser of paragraphs 66.7(2)(a) and the single amount determined under paragraph 66.7(2)(b), without regard to the individual components within paragraph 66.7(2)(b). In the case at hand, the FEDE claimed was less than both the proceeds from the sale of property and the income from production. Therefore, in this case, in the absence of a provision within subsection 66.7(2) requiring a particular allocation, the FEDE claimed can be considered to be attributable to either source of income. In addition, in determining income for purposes of subparagraph 66(4)(b)(ii), proposed clause 66(4)(b)(ii)(C) would apply to consider the FEDE determined under subsection 66.7(2) to reduce income from production before being considered to be in respect of the disposal of successored FRP.

XXXXXXXXXX. The deduction under subsection 66(4) is the lesser of paragraphs 66(4)(a) and (b). The deduction determined under subsection 66.7(2) does not directly reduce the claim determined under subsection 66(4), but reduces the total income for purposes of subparagraph 66(4)(b)(ii), which limits the FEDE claim available. If the amount determined under paragraph 66(4)(a) is less than the amount determined under paragraph 66(4)(b), the deduction under subsection 66.7(2) would have no direct impact on the subsection 66(4) deduction determined. XXXXXXXXXX we would say that the subsection 66.7(2) deduction reduces the income limit under subparagraph 66(4)(b)(ii) which may have an impact on the claim determined under subsection 66(4).

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 957-0682. A copy will be sent to you for delivery to the client.

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch