CRA finds that treaty-exempt mark-to-market gains or losses on shares are not qualifying income or losses for foreign tax credit purposes

CRA found that a Canadian insurance company would not have been able to claim foreign tax credits for U.S. withholding tax on dividends paid on its portfolio investments in shares of U.S. companies in the absence of the Canada-U.S. Treaty, as the dividends were from a Canadian source (its Canadian insurance business).  CRA went on to indicate that the company was entitled to foreign tax credits by virtue of Article XXIV of the Treaty, which deemed both the dividends and the company's mark-to-market gains or losses on the shares to be income from a Canadian source.

CRA went on to find that in applying the formula to calculate the foreign tax credit, the (income account) mark-to-market gains or losses on the shares were to be ignored as they were deemed to be a separate source of (Treaty-exempt) income under s. 126(6)(c).  Accordingly, only the dividends on the shares were "qualifying income" for purposes of the formula.  This helped the insurance company in this case, as it had mark-to-market losses for the year in question.

Neal Armstrong.  Summary of  5 November 2012 Memorandum 2012-0462151I7 under s. 126(6)(c).