3 October 2000 Internal T.I. 2000-0025237 - Carry forward of foreign tax credit

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 business foreign tax credits could be carried forward despite the fact that the business had a loss.

Position: Yes

Reasons: The law provides for this result.

			October 3, 2000

	XXXXXXXXXX  Tax Services Office	Income Tax Rulings Directorate
			Olli Laurikainen
(613) 957-2116
	Attention:  XXXXXXXXXX
	International Tax Advisor
			2000-002523

Business Foreign Tax Credit

This is in response to your memorandum dated March 15, 2000 concerning the above issue.

You provide the following details concerning a fact situation encountered during an audit.

1. An individual taxpayer immigrated to Canada from Germany in XXXXXXXXXX.

2. At the time of immigration he held an interest in two partnerships.

3. Each partnership owned an aircraft which each partnership used in its XXXXXXXXXX business (for the purposes of our reply we assume that the business of each partnership was carried on in Germany).

4. On the taxpayer's immigration subsection 96(8) of the Act applied to deem the undepreciated capital cost (the "Canadian UCC") of each aircraft to be equal to its fair market value. This amount was well in excess of the undepreciated capital cost of the aircraft for German income tax purposes (the "German UCC"). However the XXXXXXXXXX TSO appraisal section reviewed the taxpayer's valuation and it was accepted.

5. In XXXXXXXXXX each partnership sold its aircraft. In each case, the proceeds of disposition were in excess of the German UCC and less than the Canadian UCC of the aircraft. This resulted in recaptured depreciation which was included in computing the income for German income tax purposes of each partnership. The disposition also resulted in a terminal loss which was deductible in computing the income of the partnership for the purposes of the Act.

6. As a result of all of the above, the taxpayer paid a considerable amount of German income tax on his share of the income of the partnerships for German income tax purposes. Meanwhile for the purposes of the Act, the terminal losses on the disposition of the aircraft contributed toward a losses in the case of each partnership.

7. Since the taxpayer reported losses from the partnership businesses carried on in Germany for the purposes of the Act, he was unable to claim a foreign tax credit in respect of his German income taxes in XXXXXXXXXX.

You have concluded that the taxes which are not creditable under 126(2) in XXXXXXXXXX are also not deductible under subsections 20(11) and 20(12) but that they may be carried forward for a potential foreign tax credit claim in a future taxation year. You request our comments.

Our Comments

We agree with your analysis. Based on the above facts, the taxpayer would be entitled to carry-forward the German taxes paid up to seven taxation years. However, in order to ultimately benefit from such carry-forward the taxpayer will need to have income from a business carried on in Germany which has been taxed in Germany at a rate which is less than the rate of tax he pays in Canada. As Germany is generally considered a high tax jurisdiction, it may be difficult for the taxpayer to utilize the carry-forward of credits.

We also agree with your conclusion that the likely reason for the unusual result may be that the fair market value of the aircraft was overstated for the purposes subsection 96(8) of the Act at the time of the taxpayer's immigration. XXXXXXXXXX.

Finally, we would bring your attention to what appears to be a copy of the taxpayer's assessment notice from the German tax authority (Exhibit #3 of your referral). We note that paragraph 3 of Article 2 of the Canada-Federal Republic of Germany Income Tax Agreement indicates that Einkommensteur means income tax. Accordingly, based on your Exhibit #3, only XXXXXXXXXX of the XXXXXXXXXX paid by the taxpayer was actual German income tax. You may wish to inquire as to the nature of the other amounts paid to assess whether they too qualify as income or profits taxes paid to the German government. It may be that since the assessment is in respect of XXXXXXXXXX but is dated XXXXXXXXXX, that the additional amounts are representative of interest and penalties which would not be creditable under subsection 126(2) of the Act. Deductions in respect of such amounts would generally also be denied to an individual under subsection 18(1) of the Act.

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

??

- 1 -