Post-Anson, CRA maintains its position of no foreign tax credit for U.S. taxes paid by a Canadian member on undistributed LLC income

Notwithstanding Anson, CRA considers that where a Canadian-resident member’s share of LLC income is subject to U.S. tax but the income is not distributed, no Canadian foreign tax credit will be available in the year the income is earned – nor in a subsequent year given that s. 126(1) does not permit the carryforward of the foreign tax.

CRA also considers that this result is consistent with Canada’s Treaty obligations. In particular, after noting that the OECD Commentary on Art. 23B of the Model Convention “expressly contemplates that states may impose timing restrictions on claiming foreign tax credits,” and that where this is so “these countries…would be expected to seek other ways…to relieve the double taxation which might otherwise arise in [such] cases,” CRA stated:

In the case of Canada, such “other ways … to relieve the double taxation” include deductions allowed under subsections 20(11) and 20(12) of the Act. As such, in our view, the limits imposed by subsection 126(1) of the Act on claiming a foreign tax credit are in accordance with the OECD guidelines and do not affect the general principle of Article XXIV of the Treaty.

Neal Armstrong. Summaries of 13 April 2017 External T.I. 2015-0601781E5 under s. 126(1) and Treaties – Art. 24.