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Interest on tax by PE in USA – whether deductible in home country Canada
The court decided in favour of Revenue, determining that the interest on tax paid by the Canadian bank’s permanent establishment (PE) in the USA is not a deductible expense for calculating taxable income in Canada. The following observations were noted which are eye opener:
“… if there is an expenditure which would be made in any case, from which [income] may accrue, the expenditure may be deducted; but an expenditure which will not be incurred unless there is [income] is not an expenditure in order to earn [income].”
“There would be no interest paid by the Appellant without tax arrears, no tax arrears without a tax liability, and no tax liability without taxable income.”
The court reviewed the relevant section of the Canadian tax law regarding deductibility of expenses and concluded that paragraph 18(1)(a), as a general-purpose test, can disallow expenses that may also be covered under the more specific prohibition in paragraph 18(1)(t) of the Act. The Appellant argued that paragraph 18(1)(t) applies specifically to tax payable under Canadian law.
“18. (1) – General limitations – In computing the income of a taxpayer from a business or property no deduction shall be made in respect of (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property; […]
(t) any amount paid or payable under this Act (other than tax paid or payable under Part XII.2 or Part XII.6);”
Ultimately, the court rejected the Appellant’s position that the interest paid should be deductible due to foreign tax credits arising from US taxes. The court clarified that interest owed on foreign income taxes constitutes a separate matter from double taxation issues and instead relates to compliance with foreign tax obligations.
#InternationalTax, #CanadaTax
