2015-0598491I7 91(5) & FAPI included per “old” 94(1)(c)(i)(C)

Principal Issues: Can a non-resident trust that is subject to "new" subsection 94(3) deduct an amount under subsection 91(5) in respect of a FAPI inclusion resulting from the application of "old" clause 94(1)(c)(i)(C)?

Position: Yes.

Reasons: Application of the Act.

Author: Roulier, Yannick
Section: 91(5), 92, 94(3), 95(1) “FAPI”; "old" 94(1)(c)(i)(C)

                                                                             November 16, 2015

Mr. Mark Turnbull, Team Leader                          HEADQUARTERS
International Advisory Services Section               Income Tax Rulings
International and Large Business Directorate      Directorate
                                                                             Yannick Roulier

                                                                             2015-059849

91(5) Deduction – Non-Resident Trust Subject to “Old” Clause 94(1)(c)(i)(C)

This letter is in reply to correspondence received from XXXXXXXXXX, an International Tax Auditor with the XXXXXXXXXX Tax Services Office, on July 14, 2015, wherein she requested our assistance in respect of the possible application of subsection 91(5) to a particular situation involving a non-resident trust. Unless otherwise indicated, all statutory references herein are to the Income Tax Act.

Facts

The relevant facts are as follows.

A non-resident discretionary trust (“NRT”) owned all the issued and outstanding shares of a non-resident corporation (“CFA”).  NRT was subject to “old” subsection 94(1)(c) for its taxation years ending prior to December 31, 2006. Amounts in respect of CFA’s foreign accrual property income had to be included in NRT’s 2002, 2004 and 2006 taxable income by virtue of “old” clause 94(1)(c)(i)(C) (“FAPI-Inclusions”).

NRT ceased to exist in the course of the 2007 calendar year. For its taxation year ended at that time, NRT was subject to “new” section 94, as implemented by section 7 of the Technical Tax Amendments Act, 2012 (2013, c. 34, Part 1; “Bill C-48”), which generally applies to taxation years that end after 2006. In that taxation year, NRT received a dividend from CFA, which dividend had to be included in its income based on the combined application of section 90, as it then read, and paragraph 12(1)(k).

No election under paragraph 7(2)(a) of Bill C-48 was made by NRT in order to apply “new” section 94 to its 2000 to 2006 taxation years.

Issue

We’ve been asked for our views on whether a subsection 91(5) deduction would be available to NRT in respect of the dividend received from CFA in its final taxation year, in order to take into account the FAPI-Inclusions resulting from the application of “old” clause 94(1)(c)(i)(C) in 2002, 2004 and 2006.

Comments

The relevant portions of “old” subparagraph 94(1)(c)(i) read as follows:

(i) the trust is deemed for the purposes of this Part and sections 233.3 and 233.4 to be a person resident in Canada no part of whose taxable income is exempt because of section 149 from tax under this Part and whose taxable income for the year is the amount, if any, by which the total of  (…)
(C) the amount, if any, by which the total of all amounts each of which is an amount required by subsection 91(1) or (3) to be included in computing its income for the year exceeds the total of all amounts each of which is an amount deducted by it for that year under subsection 91(2), (4) or (5), and

Based on the wording of “old” clause 94(1)(c)(i)(C), the FAPI-Inclusions consist of net amounts of inclusion resulting from the application of subsections 91(1) or (3), and subsections 91(2), (4) or (5), as the case may be, in computing NRT’s income for its 2002, 2004 and 2006 taxation years. As a consequence, at any time after the above-mentioned subsections of section 91 applied, section 92 and subsections 53(1)(d) and 53(2)(b), as the case may be, apply in computing the adjusted cost base (“ACB”) to NRT of the shares of CFA. Accordingly, the FAPI-Inclusions trigger permanent adjustments to the ACB of the shares of CFA, which adjustments have to be considered in order to determine any further Canadian tax consequences to NRT in respect of its shares of CFA.

In this context, the dividend received by NRT from CFA during its final taxation year, while NRT is subject to “new” subsection 94(3), is prescribed to have been paid out of CFA’s taxable surplus by virtue of subsection 5900(3) of the Income Tax Regulations. Thus, considering that subsection 91(5) relies on the prior application of section 92 in respect of the shares of CFA, we are of the view that NRT would generally be entitled to a deduction under subsection 91(5) in computing its income for that year, provided the other conditions of that subsection are met.  This also accords with the general purpose of subsection 91(5) which is to ensure that amounts in respect of foreign accrual property income are not taxed a second time upon distribution of the related income.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers, following a 90-day waiting period (unless advised otherwise to extend this waiting period), 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 the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

We trust that these comments will be of assistance, and thank you for your enquiry.

Yours truly,

Dave Beaulne, CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c.: XXXXXXXXXX, International Audit, XXXXXXXXXX Tax Services Office
Chantal Tubie, International Tax Division, International and Large Business Directorate

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