CRA determines the Ontario corporate FTC regarding non-business income tax paid in different countries by prorating the federal FTC based on each country’s relative investment income
Canco earns $100 of investment income in each of foreign Country A and Country B, and incurs a Canadian source loss of $100, so that its net income and taxable income is $100 and its Canadian federal income tax otherwise payable (“FTOP”) at the 15% federal tax rate is $15. The “non-business-income tax” (“NBIT”) paid in each country on such investment income is $10. Canco’s Ontario allocation factor is 1, and the Ontario corporate tax rate is 11.5%.
Canco’s provincial foreign tax credit for each such country turns principally on the determination under s. 34(2) of the Taxation Act, 2007 (“TAO”) of any excess of (A) the NBIT paid to each country, of $10, over (B) the amount deductible by Canco “in respect of the foreign investment income for the year” under ITA s. 126(1).
CRA considered that it would be reasonable to determine the quoted amount on a pro rata basis in proportion to the foreign investment income earned in each country (i.e., half and half, or $7.50 and $7.50) – so that the provincial FTC for each country would be $2.50 (being the Ontario domestic factor of 1, multiplied by the excess of $10 of the NBIT paid to each country over $7.50).
Neal Armstrong. Summary of 17 August 2021 External T.I. 2020-0842981E5 under Taxation Act, 2007, s. 34(2).