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:
Clarification of the integration between section 118.61 (unused tuition and education credits) and section 126 (foreign tax credits). When there are both tuition and education credits available and non-business foreign tax paid, which tax credit is calculated first.
Position TAKEN:
The tuition and education credits are calculated and claimed prior to calculating non-business foreign tax credits.
Reasons FOR POSITION TAKEN:
The definition of "tax for the year otherwise payable under this Part" in subsection 126(7) requires that the foreign tax credit is calculated after the benefit of the tuition and education credits are claimed.
XXXXXXXXXX 2000-001144
T. Young
September 13, 2000
Dear XXXXXXXXXX:
Re: Unused Tuition and Education Tax Credits - Section 118.61
This is in reply to your letter of March 2, 2000, regarding the interaction of sections 118.5 (tuition credits), 118.6 (education credits), 118.61 (unused tuition and education tax credits), and 126 (Foreign Tax Credits) of the Income Tax Act (the "Act").
You have described a situation where a taxpayer has taxable income in 1998, which includes Canadian employment income, foreign employment income, and Canadian investment income. The taxpayer also has eligible tuition and education credits and has paid non-business foreign tax on the foreign employment income. You have enquired whether the taxpayer can claim a non-business foreign tax credit to create unused tuition and education credits that can be carried forward to future years (pursuant to section 118.61 of the Act).
Your letter also referred to Revenue Canada opinion letter 9918415 (Gwen Moore, September 14, 1999), which stated that a taxpayer could carry forward unused tuition and education credits if Part I tax can be fully offset by dividend tax credits under section 121 of the Act.
For purposes of this letter, we have assumed that the taxpayer is resident in Canada for tax purposes throughout the entire year in question.
When a taxpayer has paid non-business foreign taxes, subsection 126(1) of the Act allows the taxpayer to claim a non-business foreign tax credit. Generally, the amount of the credit is equal to the lesser of the amount of non-business foreign taxes paid and the portion of "tax for the year otherwise payable under this Part" relating to that foreign source income. For example, if the taxpayer's non-business foreign income makes up one-half of the taxpayer's total income for the year, the taxpayer's non-business foreign tax credit would be limited to one-half of the taxpayer's federal tax payable.
"Tax for the year otherwise payable under this Part" is defined in subsection 126(7) of the Act and generally means the amount of Part I tax payable without taking into account deductions for foreign tax credits, dividend tax credits, and various other tax credits. However, tuition and education credits are not included in the list of exclusions and, therefore, must be deducted before calculating "tax for the year otherwise payable under this Part".
In the situation you described, the tuition and education tax credits would first reduce the "tax for the year otherwise payable under this Part". A non-business foreign tax credit could be claimed against the remaining Part I tax. Had the taxpayer's foreign income been property income, any unused portion of non-business foreign taxes paid could have been claimed as a deduction under subsection 20(12) of the Act. However, since the income described in your letter is employment income, any unused portion of non-business foreign tax paid is lost.
For purposes of this letter, the relevant portion of the calculation of the unused tuition and education credits carryforward in subsection 118.61(1) of the Act is:
B - C
where:
B equals the taxpayer's current year tuition and education credits
C the lesser of the value of B and the amount that would be the individual's tax payable under this Part for the year if no amount were deductible under 118.5 or 118.6
In the circumstances you describe, it is our position that the non-business foreign tax credit, if any, that was calculated above would reduce the tax payable as calculated by variable C. The remaining tax payable would either reduce or fully offset the tuition and education credits in B resulting in a reduced or nil unused tuition and education credits carryforward.
Please note the difference between this situation and that dealt with in opinion letter 9918415. Dividend tax credits are fixed (i.e., 2/3 of the dividend gross-up) whereas the calculation of foreign tax credits is affected by other available credits. In other words, when calculating Variable C in subsection 118.61(1) of the Act, the exclusion of tuition and education credits allows the full value of the dividend tax credits to be used; whereas, foreign tax credits are reduced by available tuition and education credits. You should also note that opinion letter 9918415 would not apply to 1999 and later years under the proposed amendments to section 118.61 of the Act contained in a Notice of Ways and Means Motion released on June 5, 2000. The amendments change the ordering of credits so that tuition and education credits must be fully utilised before dividend tax credits may be claimed. This makes the treatment of dividend tax credits consistent with the treatment of other credits including foreign tax credits.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
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