2025 Ruling 2024-1039511R3 - Computation of FAT

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.

Principal Issues: Allocation of discretionary deductions allowed under foreign law between the active business and the FAPI-generating business of a foreign affiliate for the purpose of determining the foreign tax that “may reasonably be regarded as applicable” to the FAPI for purposes of determining FAT.

Position: In determining the amount of foreign tax that may reasonably be regarded as applicable to FAPI, foreign discretionary deductions should first be allocated to the income from an activity to which they may reasonably be regarded as applicable.

Reasons: The language in the FAT definition in subsection 95(1) requires an allocation of foreign tax to FAPI on reasonable basis.

XXXXXXXXXX 2024-103951

XXXXXXXXXX, 2025

Dear XXXXXXXXXX,

Re:	Advance Income Tax Ruling 
	XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above-noted taxpayers (the “Ruling Request”), as amended and supplemented by additional information provided in subsequent email correspondence.

We understand that to the best of your knowledge and that of the taxpayers, none of the Proposed Transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the taxpayers or a related person and:

a) being considered by the CRA in connection with such return;

b) under objection by the taxpayers or a related person;

c) the subject of a current or completed court process involving the taxpayers or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate in relation to the taxpayers or a related person.

Unless otherwise noted, all references herein to the “Act” or to a section or component thereof are references to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”).

All terms used herein that are defined in the Act have the meaning given in such definition.

All references to monetary amounts are in Foreign Currency, as defined below.

The rulings given herein (the “Rulings”) are based solely on the Facts, Proposed Transactions, and Purpose of Proposed Transactions described below. Facts and transactions described in the Ruling Request and in any documents and correspondence submitted with or subsequent to your Ruling Request do not form part of the facts and transactions on which the Rulings is based, except to the extent they are reproduced herein. The singular should be read as plural and vice versa where the circumstances so require.

Definitions

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Proposed Transactions will be referred to as follows:

“active business” has the meaning under subsection 95(1) and in the case of FA Opco, it is its XXXXXXXXXX carried on in the Foreign Country (that, for greater certainty, excludes the FAPI Business);

“Acquisition” means the acquisition in XXXXXXXXXX of the shares of FA Holdco, which was a XXXXXXXXXX at that time, by the Taxpayer;

“Canada Holdco” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“CFL” means non-capital losses carried forward;

“CRA” means the Canada Revenue Agency;

“FA Holdco” means XXXXXXXXXX, a company formed under the laws of the Foreign Country;

“FA Opco” means XXXXXXXXXX, a company formed under the laws of the Foreign Country;

“FA Subco” means XXXXXXXXXX, a company formed under the laws of the Foreign Country;

“FAPI” means “foreign accrual property income” within the meaning assigned by subsection 95(1);

“FAPI Business” means XXXXXXXXXX and any other activity of FA Opco that generates FAPI;

“FAT” means “foreign accrual tax” within the meaning assigned by subsection 95(1);

“Foreign Country” means XXXXXXXXXX;

“Foreign Currency” means XXXXXXXXXX;

“Foreign Group” means FA Holdco, FA Subco, FA Opco, and their subsidiaries;

“Paragraph” means a numbered paragraph in this letter;

“Proposed Transactions” means the transactions described in the Proposed Transactions section of this letter;

“Pubco” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“Taxpayer” means XXXXXXXXXX, a company formed under the laws of XXXXXXXXXX.

Our understanding of the facts, transactions and purpose of the transactions is as follows:

Facts

1. Pubco, through its indirect wholly owned subsidiaries, is the largest provider of XXXXXXXXXX. (footnote 1)

2. Pubco is a public corporation and its common shares are listed and actively traded on XXXXXXXXXX. Pubco was incorporated in Canada and is a “Canadian corporation.”

3. The shares of Pubco are widely held and no person or group of persons controls Pubco.

4. Canada Holdco is a Canadian corporation all of the shares of which are held by Pubco.

5. The Taxpayer is a Canadian corporation all of the shares of which are held by Canada Holdco.

6. FA Holdco is a company resident in the Foreign Country all of the ordinary common shares of which are held by the Taxpayer.

7. FA Subco is a company resident in the Foreign Country all of the shares of which are held by FA Holdco. FA Subco is a holding company that does not carry on any business operations or activities.

8. FA Opco is a company resident in the Foreign Country all of the issued shares of which that are paid-up are held by FA Subco. XXXXXXXXXX.

9. Each of the entities in the Foreign Group became a controlled foreign affiliate of the Taxpayer as a result of the Acquisition.

10. The Foreign Group is in the business of providing XXXXXXXXXX, both in the Foreign Country and internationally, primarily through FA Opco. That XXXXXXXXXX in the Foreign Country.

11. Prior to the Acquisition, FA Opco carried on the active business and the FAPI Business. FA Opco was also a holding company to other wholly owned foreign subsidiaries.

12. FA Opco continues to carry on the same active business and FAPI Business since the Acquisition.

13. The FAPI Business is the only significant activity other than the active business of FA Opco. The FAPI Business has not and does not have significant operating costs other than XXXXXXXXXX.

14. As of XXXXXXXXXX, FA Opco had CFL in the amount of approximately XXXXXXXXXX, of which XXXXXXXXXX was incurred prior to the Acquisition.

15. FA Opco’s CFL consist of losses in the amount of approximately XXXXXXXXXX which arose mainly from operating expenses XXXXXXXXXX, but also XXXXXXXXXX. FA Opco also has losses from XXXXXXXXXX incurred prior to the Acquisition in the amount of approximately XXXXXXXXXX, related to FA Opco’s share ownership in wholly-owned subsidiaries.

16. No material operating expenses and interest expenses giving rise to CFL were incurred in respect of the FAPI Business.

17. FA Opco has certain other tax attributes under Foreign Country tax law, in addition to the CFL, which it may deduct on a discretionary basis to reduce its income subject to tax in the Foreign Country for each given taxation year. These tax attributes include the following:

- amortization of the tax basis of the cost of tangible assets which are used in the carrying on of FA Opco’s active business in the Foreign Country.

- XXXXXXXXXX prior to the Acquisition that is deductible only when paid under Foreign Country tax law. Such XXXXXXXXXX the active business in the Foreign Country prior to the Acquisition.

18. XXXXXXXXXX.

19. FA Opco and the Foreign Group are subject to a corporate income tax rate of XXXXXXXXXX% in the Foreign Country.

20. Any Foreign Country taxes owing by FA Opco for a particular taxation year will be paid in full by FA Opco by the time its Foreign Country tax return is filed for that year (i.e., within 12 months of the end of the accounting period).

Proposed Transactions

21. Based on XXXXXXXXXX for the XXXXXXXXXX taxation year, FA Opco incurred a loss in that year and will not owe income tax to Foreign Country for that year.

22. Based on forecasts (footnote 2) , FA Opco is anticipated to report the following for Foreign Country’s corporate tax purposes in respect of its XXXXXXXXXX taxation year:

a. total income for Foreign Country’s corporate tax purposes (before deducting discretionary items and CFL) of XXXXXXXXXX, which is composed of net income from its FAPI Business of XXXXXXXXXX and net income from its active business of XXXXXXXXXX;

b. deduction of a minimum of XXXXXXXXXX of CFL and/or discretionary items for Foreign Country’s corporate tax purposes, reducing its total net income determined for Foreign Country’s corporate tax purposes to around XXXXXXXXXX.

c. FA Opco’s Foreign Country corporate income tax payable on total net income of XXXXXXXXXX will be XXXXXXXXXX. FA Opco does not anticipate claiming any deduction for an amounts that would be equivalent of a tax credit within the meaning of the Act.

23. The breakdown of the CFL and discretionary items that FA Opco is anticipated to deduct for Foreign Country’s corporate tax purposes in respect of its XXXXXXXXXX taxation year is as follows:

i. CFL of XXXXXXXXXX;

ii. XXXXXXXXXX of other discretionary items which include tax amortization; and

iii. XXXXXXXXXX.

24. Based on forecasts (footnote 3) , FA Opco is anticipated to report the following for Foreign Country’s corporate tax purposes in respect of its XXXXXXXXXX taxation year:

a. total income for Foreign Country’s corporate tax purposes (before the deduction of discretionary items and CFL) of XXXXXXXXXX, which is composed of net income from its FAPI Business of XXXXXXXXXX and net income from its active business of XXXXXXXXXX.

b. deduction of a minimum of XXXXXXXXXX of CFL and/or discretionary items for Foreign Country’s corporate tax purposes to reduce its total net income determined for Foreign Country’s corporate tax purposes to at least XXXXXXXXXX.

c. FA Opco’s Foreign Country corporate income tax payable on total net income of XXXXXXXXXX will be XXXXXXXXXX. FA Opco does not anticipate claiming any deduction for an amounts that would be equivalent of a tax credit within the meaning of the Act.

25. The breakdown of the CFL and discretionary items that FA Opco is anticipated to deduct for Foreign Country’s corporate tax purposes in respect of its XXXXXXXXXX taxation year is as follows:

i. CFL of XXXXXXXXXX;

ii. XXXXXXXXXX of other discretionary items which include the Foreign Country tax amortization; and

iii. XXXXXXXXXX.

Purpose of Proposed Transactions

The overall purpose of the Proposed Transactions is to reduce and minimize FA Opco’s Foreign Country tax liability through the use of CFL and discretionary expenses while at the same time maximizing the amount of residual Foreign Country tax that qualifies as FAT in respect of the FAPI from FA Opco’s FAPI Business that is included in computing the Taxpayer’s income.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, purpose of proposed transactions, and provided further that the Proposed Transactions are completed in the manner described above, and there are no other transactions that may be relevant to the Rulings given, we rule as follows:

A. For the purpose of subsection 91(4), the amount of FAT applicable to the amount of FAPI from the FAPI Business included under subsection 91(1) in computing the Taxpayer's income for each of its XXXXXXXXXX taxation years in respect of FA Opco is the amount of the total Foreign Country corporate income tax paid by FA Opco in respect of each such year multiplied by the fraction of:

1. FA Opco’s gross income from the FAPI Business computed under the Foreign Country tax law for that taxation year, reduced by:

a. the total amount of deductions allowed under the Foreign Country tax law and claimed by FA Opco in that taxation year that may reasonably be regarded as directly applicable to the FAPI Business plus

b. the total amount of deductions allowed under the Foreign Country tax law and claimed by FA Opco in that taxation year that may not reasonably be regarded as directly applicable to the FAPI Business, active business or to other income generating activities multiplied by the fraction of FA Opco’s gross income from the FAPI Business in that year over FA Opco’s total gross income;

2. over FA Opco’s total net income for that taxation year determined for Foreign Country’s corporate tax purposes.

B. The amount determined in ruling A is converted to Canadian currency pursuant to section 261.

Comments

The above Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R12 last updated on April 1, 2022 and is binding on the CRA in respect of the amount of FAT of the Taxpayer in respect of FA Opco for its XXXXXXXXXX taxation years.

Nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or made any determination in respect of:

- the Facts, Proposed Transactions, or any transaction or event taking place either prior or subsequent to the Proposed Transactions, whether described in this letter or not;

- any tax consequences relating thereto other than those specifically described in the Ruling given above;

- determination of the CFL or the amount of any discretionary deductions, and their origins;

- the determination of expenses that can reasonably be regarded as directly applicable or not directly applicable to the FAPI Business or any other income generating activity for purposes of ruling A;

- application of any tax credits (or amounts that would be equivalent of a tax credit within the meaning of the Act) that may be available to FA Opco in Foreign Country.

An invoice for our fees in connection with this Ruling will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Based on consolidated financial statements for XXXXXXXXXX.

2 The figures are based on forecasts using data and information available as XXXXXXXXXX. While the figures presented reflect the most accurate numbers at the time of the projections, the actual results may be different.

3 Ibid.