[2013] 4 F.C.R. D-6
Income Tax
Income Calculation
Deductions
Foreign non-business income tax—Appeal form T.C.C. decision (2012 TCC 3) dismissing appeal with respect to assessment for 2002 taxation year—Issue whether predecessor corporation of appellant, GL&V/Dorr-Oliver Canada Inc. (Dorr-Oliver), entitled to deduct its share of U.S. income tax paid by limited partnership of which it was a member pursuant to Income Tax Act, R.S.C., 1985 (5th Supp.), c. 1, s. 20(12)—Controversy surrounding requirement that U.S. tax sought to be deducted be “in respect of that income” (first condition) but not be reasonably regarded as having been paid “in respect of income from a share of the capital stock of a foreign affiliate” (second condition)—T.C.C. finding that income computed by Dorr-Oliver was income from property, U.S. tax sought to be deducted was tax paid “in respect of that income”—Accordingly, first condition met—However, T.C.C. holding that income tax sought to be deducted could also be regarded as having been paid “in respect of income from a share of the capital stock of a foreign affiliate”, meaning that second condition, framed in the negative, not met—Dorr-Oliver wholly owned subsidiary of Groupe Laperrière Verrault (GL&V)—Issue arising in context of use by GL&V of cross-border structure in order to fund acquisition of U.S. businesses in tax efficient manner—Tax efficiency achieved by use of “hybrid entities” – i.e. entities treated differently under U.S., Canadian tax laws—Limited partnership herein such an entity—Also included in present structure are Nova Scotia unlimited liability company (NSULC), shares of which held by GL&V limited partnership; U.S. limited liability company (LLC), shares of which held by NSULC—Both NSULC, LLC disregarded entities under U.S. tax law – i.e. existence thereof ignored for U.S. tax purposes but treated as existing entities under Act—While T.C.C. finding with respect to second condition (above) that U.S. tax reduced amount that could be paid by LLC to NSULC made in error, T.C.C. making same observation in assessment of first condition—Result of these errors, if material, would be that appellant meeting second condition, but not first —Appellant arguing as basis for two conditions to be met that while “economic profit” from NSULC dividend reduced by U.S. tax, “economic profit” from LLC dividend not so reduced—However, notion that dividend can be viewed as “profit” from share foreign to Act—In any event, insofar as appellant’s argument based on premise that NSULC dividend used to pay U.S. tax, record falling short of establishing that this in fact taking place—Whether T.C.C. correctly construing words “in respect of” or whether narrower meaning warranted, appeal cannot succeed—In alternative, appellant arguing that T.C.C. erring in finding that second condition not met because U.S. tax paid by GL&V limited partnership, not by corporation as contemplated by second condition—However, partnership paying no tax under Act—Although income computed at partnership level as though a person, resulting income allocated to partners and tax paid by partners on their proportionate share of the income—U.S. tax thus can be said to have been paid by a corporation, can therefore “reasonably be regarded” as having been paid by a corporation as contemplated by Act, s. 20(12)—Appeal dismissed.
FLSmidth Ltd. v. Canada (A-47-12, 2013 FCA 160, Noël J.A., reasons for judgment dated June 18, 2013, 18 pp.)