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July 11 — The Tax Court of Canada upheld an appeal by a Canadian subsidiary of major U.S. investment firm CIT Group Inc. that more than C$220 million ($170 million) in income earned by its foreign affiliates shouldn't be taxed in Canada ( CIT Grp. Secs. (Can.) Inc. v. The Queen, Can. Tax Ct., No. 2012-950(IT)G, 7/4/16 ).
The court found that while nine Barbados subsidiaries of CIT Group Securities (Canada) Ltd. were controlled foreign affiliates as defined in Section 95 of Canada's Income Tax Act, their income in the 2003-09 tax years was exempt from the Act's foreign accrual property income provisions because it was earned by a foreign bank.
Activities of the Barbados subsidiaries, consolidated through CCG Trust Corp., met the definition of “foreign bank” in Canada's Bank Act, which doesn't require an entity to be licensed as a bank under the foreign country's laws, nor to carry on a banking business as such, Justice J.R. Owen said in the ruling, dated July 4 but made public July 11.
The ruling also rejected the Canada Revenue Agency's arguments that CIT Group's corporate structure established a “conduit” intended to avoid taxation in Canada. Any movement of funds was based on the legal status of the various parties and their legal relationships, and the tax agency didn't challenge them under either the Canadian statute's general anti-avoidance rule or transfer pricing rules, it said.
“The Supreme Court of Canada has long since put to rest the notion that the sophistication of the tax planning alters the manner in which one should interpret specific provisions in the Income Tax Act,” it said, pointing to the top court's 1992 ruling in Shell Canada Ltd. v. Canada.
The ruling directed the Canada Revenue Agency to reassess the taxpayer's 2003-09 tax returns on the basis that the specified income wasn't subject to the foreign accrual property income rules. It gave the parties 30 days to make submissions on costs.
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The ruling is at http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/145887/index.do.
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