21 February 2000 External T.I. 1999-0010295 - Subsections 20(11), 20(12) and 126(1)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether U.S. taxes paid by an individual who owns all the shares of a Nova Scotia ULC which owns all the shares of a U.S. LLC are eligible for a deduction under subsection 20(11) or 20(12) or a foreign tax credit under subsection 126(1).

Position: No. Subsection 20(11) does not apply. The taxpayer may be entitled to the subsection 20(12) deduction and/or a foreign tax credit under subsection 126(1).

Reasons: There is no foreign source income that has been included in computing the taxpayer's income for the purposes of subsection 20(11). The tax paid is non-business income tax and there is nothing in subsection 20(12) which precludes a deduction under that subsection from creating a loss.

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XXXXXXXXXX 1999-001029
S. Leung
Attention: XXXXXXXXXX

February 21, 2000

Dear Sirs:

Re: Subsections 20(11), 20(12) and 126(1) of the Income Tax Act ("the Act")

We are writing in reply to your letter in which you requested our view as to whether the above-noted provisions of the Act apply to the following hypothetical situation.

The Situation

1. ULC is a unlimited liability corporation incorporated under the law of Nova Scotia and is a resident in Canada. All of the shares of ULC are owned by an individual (the taxpayer) who is resident in Canada.

2. ULC has elected to be treated as a partnership for U.S. tax purposes.

3. ULC owns all the shares of a limited liability corporation ("LLC") in the U.S. that has elected to be treated as a partnership for U.S. tax purposes. For Canadian tax purposes LLC is treated as a corporation.

4. LLC owns certain U.S. properties through which LLC earns business income.

5. The taxpayer pays U.S. taxes on the income earned by LLC.

You enquired:

(a) where LLC pays a dividend to ULC which in turn pays a dividend to the taxpayer, whether the taxpayer is entitled to a deduction under subsection 20(11) of the Act for the U.S. taxes paid by the taxpayer in respect of the income earned by LLC; and

(b) where no distribution is made by LLC, or where LLC makes such a distribution but ULC does not, whether the taxpayer is entitled to a deduction under subsection 20(12) of the Act or a foreign tax credit under subsection 126(1) thereof for the U.S. taxes paid by the taxpayer in respect of the income earned by LLC.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable District Taxation Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.

In scenario (a) where LLC pays a dividend to ULC which in turn pays a dividend to the taxpayer, subsection 20(11) of the Act would not apply because the U.S. taxes paid by the taxpayer can not be said to be in respect of an amount that has been included in computing the taxpayer's income from a property the income from which is income from a source outside Canada as the dividend from ULC is not foreign source income to the taxpayer. If the taxpayer otherwise has U.S. source income, he or she may be entitled to a foreign tax credit under subsection 126(1) of the Act or the amount of such U.S. taxes not used for foreign tax credit purposes may be deducted under subsection 20(12) of the Act in computing the income from the shares held by the taxpayer in ULC.

In scenario (b) where no distribution is made by LLC or where LLC makes a distribution but ULC does not, if the taxpayer otherwise has U.S. source income, the taxpayer may be entitled to a foreign tax credit under subsection 126(1) of the Act in respect of U.S. taxes paid by the taxpayer in respect of the income earned by LLC. In this regard, although LLC generates business income, the U.S. taxes paid by the taxpayer are not considered to be business income taxes as defined under subsection 126(7) of the Act because they are not in respect of any business carried on by the taxpayer in the U.S. Rather, they are paid in respect of a share of a corporation. To the extent that the U.S. taxes are not used for claiming a foreign tax credit, they may be deducted under subsection 20(12) of the Act. Although what the taxpayer owns is the shares of ULC which is a Canadian corporation, the U.S. taxes paid can be considered to be in respect of such shares such that the deduction under subsection 20(12) of the Act would not be denied because that subsection, unlike subsection 20(11), does not use the clause "that is income from a source outside Canada". In this situation the property is the shares of ULC. If the taxpayer did not own such shares he would not have to pay the U.S. taxes and there is nothing in subsection 20(12) of the Act which precludes the deduction from creating a loss.

As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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