CRA seemingly reverses a previous position that s. 20(12) applies on a source-by-source basis, so that taxes paid on business income are not eligible where the Canadian taxpayer only earns property (dividend) income

In 2011-0394631I7, CRA indicated that a Canadian corporation (“Canco”), holding shares of disregarded LLCs through a US LP that was a corporation for Code purposes, was not entitled to a s. 20(12) deduction for its share of the U.S. corporate income taxes of the US LP, on the grounds that those US taxes were paid in respect of business income (as the LLCs were carrying on active businesses) rather than property income, whereas the only source of income of Canco was property income, namely, the LLC dividends.

Without mentioning it, CRA, in a laconic recent technical interpretation, appears to have reversed this 2011 interpretation. On essentially the same facts, except that the taxpayer was a Canadian-resident individual holding his interest in the US LP through a Canadian LP, CRA indicated that the taxpayer could claim an s. 126(1) foreign tax credit, or a deduction under s. 20(11) or (12), provided the usual conditions were satisfied. The relevant development since 2011 may be that in Smidth (affirmed on different ground by the FCA), Paris J stated, with apparent approval, that in 2008-0284351I7 “the CRA accepted that the 20(12) deduction was available where the U.S. tax was paid on income from a source that is different from the taxpayer’s source of income under the Act” (as well as referring with approval to 1999-0010295).

Neal Armstrong. Summary of 2015-0572461I7 under s. 20(12).