2016-0641721I7 Subparagraph 152(4)(b)(iv) reassessment

Principal Issues: Whether subparagraph 152(4)(b)(iv) of the Income Tax Act (the “Act”) permits an assessment or reassessment of a corporate taxpayer for a taxation year to be made within the three-year period after the normal reassessment period in the context of the addition to taxable income under section 110.5 of the Act and a foreign tax credit available under subsection 126(1) or (2) of the Act.

Position: An assessment or reassessment may be considered within the three-year period after the normal reassessment period in certain circumstances.

Reasons: An assessment or reassessment to claim a foreign tax credit for a taxation year would be considered one made as a consequence of a payment (or reimbursement) of foreign taxes within the three-year period after the normal reassessment period under subparagraph 152(4)(b)(iv) of the Act. Where the corporate taxpayer was unable to utilize any foreign tax credit for the taxation year, an addition to taxable income for the taxation year under section 110.5, if applicable, may also be considered as a consequence to the payment (or reimbursement) of foreign taxes.

Author: Ouimet, Jennifer
Section: 110.5; 126(1); 126(2); 152(4)(b)(iv), 111(8)

                                                                                                                                                   December 5, 2016

Legislative Applications Section                                                                                                 HEADQUARTERS
International and Large Business Directorate                                                                             Income Tax Rulings
Large Business Audit Division                                                                                                     Directorate
                                                                                                                                                     J. Ouimet, CPA, CA
Attention: Leslie Bafia
                                                                                                                                                     2016-064172

Section 110.5 and subparagraph 152(4)(b)(iv) reassessments

We are writing in reply to your request to clarify our comments with respect to the extended reassessment period described in subparagraph 152(4)(b)(iv) of the Income Tax Act (the “Act”) in the context of the addition to taxable income under section 110.5 of the Act and a foreign tax credit available under subsection 126(1) or (2) of the Act. Specifically, you have requested clarification of the views expressed in our letters dated December 9, 2010 (our file 2010-037980) and July 16, 2013 (our file 2013-048115) which you suggest contain conflicting statements, with respect to the reassessment period available for a section 110.5 addition to taxable income.

Document 2010-037980 considered (i) whether a section 110.5 addition to taxable income can be made beyond the normal reassessment period as defined in subsection 152(3.1), and (ii) does subparagraph 152(4)(b)(iv) of the Act extend the normal reassessment period to six years on a section 110.5 addition to taxable income. The document opined that (i) the request for the addition to taxable income under section 110.5 must be made in the year the return is filed, and (ii) subparagraph 152(4)(b)(iv) does not apply to extend the normal reassessment period on a section 110.5 addition to taxable income since a section 110.5 addition to taxable income does not result in a payment or reimbursement of any income or profits taxes to or by the government of a country other than Canada.

In document 2013-048115, we were asked to re-examine the opinions expressed in document 2010-037980. In this regard, document 2013-048115 commented that there is a causal connection between the foreign tax paid and the adjustment to claim the foreign tax credit, regardless of whether the adjustment includes an addition to taxable income under section 110.5 of the Act. Accordingly, document 2013-048115 opined that a reassessment, which is by necessity a result of section 110.5 and subsections 126(1) or 126(2) would be a reassessment made as a consequence of a payment or reimbursement of income tax to or by the government of a country other than Canada under subsection 152(4)(b)(iv) of the Act.

Our Comments

Generally, subsections 126(1) and (2) of the Act permit a taxpayer to deduct, from tax otherwise payable, for a taxation year, a foreign tax credit for amounts paid in respect of any business-income tax or non-business income tax paid by the taxpayer for the taxation year. In general terms, the foreign tax credit available under subsections 126(1) and (2) of the Act is equal to the lesser of the foreign tax paid on the taxpayer’s foreign source income and the Canadian tax that would otherwise be payable on that income. Any unused foreign tax credits with respect to business-income tax under subsection 126(2) of the Act can be carried forward up to ten years or back for three years.

In certain circumstances, such as when a taxpayer has incurred a loss for the taxation year from other sources, the taxpayer’s Canadian tax otherwise payable may be less than the foreign tax paid on the taxpayer’s foreign income resulting in a reduced amount that may be claimed as a foreign tax credit. Where a corporation would not otherwise be able to fully utilize the foreign tax credits for a taxation year, section 110.5 of the Act permits the corporation to increase its taxable income for the year to the extent that the addition increases the amount deductible by the corporation as a foreign tax credit under subsections 126(1) or (2) of the Act, but does not increase an amount deductible by the corporation under a provision set out in paragraph 110.5(b) of the Act. The addition to the corporation’s taxable income for a taxation year under section 110.5 of the Act is added to the calculation of the corporation’s “non-capital loss” for the taxation year, pursuant to element B of the definition of that term in subsection 111(8) of the Act. Therefore, section 110.5 of the Act provides a corporation with an option of generating a foreign tax credit in respect of foreign taxes and effectively converts them into a non-capital loss.

We wish to clarify that document 2013-048115 reconsidered the opinions expressed in document 2010-037980. In this regard, where a taxpayer files a return of income for a taxation year that reports an amount paid in respect of income tax paid to the government of a country other than Canada (“Foreign Taxes”), the taxpayer would typically have available a foreign tax credit under subsections 126(1) or (2) of the Act, as the case may be, with respect to the Foreign Taxes. Where the corporate taxpayer was otherwise unable to utilize any foreign tax credit for the taxation year, the taxpayer may claim an amount under section 110.5 of the Act, if applicable. Moreover, in our view, the Minister may make an assessment or reassessment under subsection 152(4) of the Act with respect to any foreign tax credit claim or, where applicable, an addition to taxable income under section 110.5 of the Act, as the case may be, for a taxation year at any time before the expiration of the normal reassessment period, as defined in subsection 152(3.1) of the Act.

In addition, pursuant to subsection 152(4) of the Act the Minister may not assess or reassess tax payable for a taxpayer after the normal reassessment period in respect of a taxation year unless any of the exceptions described in subsection 152(4) apply. In particular, subparagraph 152(4)(b)(iv) of the Act permits the Minister to assess, reassess or make an additional assessment of tax within three years after the end of the normal reassessment period in respect of the taxation year where the assessment is made “as a consequence of a payment or reimbursement of any income or profits tax to or by the government of a country other than Canada”. Moreover, subparagraph 152(4.01)(b)(iv) of the Act limits the circumstances in which the Minister can reassess beyond the normal reassessment period only to the extent that it would reasonably be regarded as relating to the payment or reimbursement referred to in subparagraph 152(4)(b)(iv) of the Act.

Furthermore, it should be noted that document 2013-051260 further clarified the above-mentioned documents and stated that a foreign tax credit under subsections 126(1) or (2) and the addition to taxable income under section 110.5 of the Act are not considered permissive amounts in the context of Information Circular IC 84-1, Revision of capital cost allowance claims and other permissive deductions. Moreover, any taxpayer requests for adjustments in this regard are subject to the Minister’s discretion and determined on a case-by-case basis by the relevant Tax Service Office.

We trust our comments will be of assistance.

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.

Yours truly,

Bob Naufal
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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