CRA confirms that s. 60 deductions do not reduce foreign source income for FTC purposes

S. 126(1)(a) generally denies a foreign tax credit for non-business income taxes paid to a country’s government to the extent that the taxpayer does not have (non-business) income sourced in that country. A CRA ruling dealt with a Canadian-resident individual who contributed to a 401(k) plan while employed in the U.S. He will now collapse the plan and contribute all or part of the withdrawn amount (which will be subject to U.S. withholding tax and to a sort of penalty tax of 10% of the withdrawn amount under Code s. 72) to his RRSP, and claim a s. 60(j) deduction for this contribution.

CRA ruled that for purposes of s. 126(1)(b)(i), his U.S.-source income will be the gross amount included in his income under s. 56(1)(a)(i), without deduction for his claim under s. 60(j). Thus, he potentially can receive a full FTC for the U.S. withholding and penalty tax even though his net U.S.-source income might be nil. Although this might seem contrary to IPL, the key may be s. 4(2), which provides that s. 60 deductions do not reduce income from a particular source.

Neal Armstrong. Summary of 2015 Ruling 2015-0572541R3 under s. 126(1) and s. 60(j).