CRA considers foreign affiliate rules applicable where foreign tax regime changes

In 2012-0460121E5, the CRA was asked to consider a case where under the foreign tax law a foreign affiliate (FA) ceases to be required to compute its net income for foreign tax purposes. Rather, going forward, the foreign tax law allowed the payment of tax as a percentage of the FA’s gross revenue (a flat tax). The CRA confirmed that in such case the FA must compute its “earnings” using Canadian tax rules. Further, in computing those earnings, any amounts (for example, tax deprecation) previously deducted by the FA under the former foreign income tax law would also be considered to have been previously claimed for purposes of computing its earnings under Canadian tax rules going forward (proposed Regulation 5907(2.03)).