CRA would accommodate a s. 20(12) deduction for US operating-income taxes imposed on the Cdn LLC member even where his only Cdn income from the LLC is taxable capital gain

A Canadian-resident individual was subject to U.S. income tax on his share of the U.S.-source business income of the LLC for a particular year (none of which was distributed) and, at the end of the year, realized a substantial capital gain for Canadian purposes on the winding up of the LLC. The individual would be able to claim a foreign tax credit in his Canadian return for that year for the U.S. income taxes, based on the taxable capital gain giving rise to a U.S. source of income for s. 126(1) purposes. More interestingly, CRA also considers that the individual would have the option of treating the LLC as a source of property income in that year (being potential dividend income – and even though no dividend was ever actually received before the winding up), so that the individual would be entitled to instead deduct the U.S. income taxes in computing property income under s. 20(12), even though no deduction under s. 20(12) is permitted respecting a capital gain.

Neal Armstrong. Summaries of 3 February 2016 External T.I. 2014-0548111E5 under s. 20(12), s. 126(1), s. 20(11) and Treaties Art. 24.