14 December 2000 External T.I. 2000-0029575 - section 126 of the Act

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: Meaning of for the year in paragraph 126(1)(a).

Position: Means the year for which the foreign income or profit tax is exigible in the foreign country.

Reasons: The law.

XXXXXXXXXX 2000-002957

Attention: XXXXXXXXXX

December 14, 2000

Dear Sir\Madam:

Re: Section 126 of the Income Tax Act (the "Act")

We are writing in response to your facsimile letter of June 1, 2000 wherein you requested a technical interpretation with respect to the meaning of the phrase "non-business-income tax paid by the taxpayer for the year" as used in paragraph 126(1)(a) of the Act in the following situation.

In your letter you indicate that Xco, a Canadian resident corporation, operates a branch in the U.S. You state that Xco is also a partner of a partnership ("AP") that owns a U.S. office building as a rental property. You indicate that AP sold the office building in July 20X0 which resulted in a capital gain that is subject to tax in Canada and the U.S. You advise that for Canadian income tax purposes AP's fiscal period ends on March 31 but for U.S. income tax purposes it ends on December 31. However, Xco's taxation year for Canadian income tax purposes ends on November 30 but its U.S. branch has a December 31 year end for U.S. income tax purposes.

You note that under the rules in section 96 of the Act, Xco must include its proportionate share of AP's income in its income for the particular taxation year in which AP's fiscal period ends. Since AP's capital gain from the disposition of the U.S. office building occurred in AP's fiscal period ending March 31, 20X1, under the Act, Xco's income inclusion of its proportionate share of this capital gain (along with its share of other income of AP for that year) does not arise until its November 30, 20X1 taxation year. However, for U.S. income tax purposes, since AP and Xco have the same fiscal periods Xco's portion of the capital gain (along with its share of other income of AP for that year) will be included in its December 31, 20X0 taxation year.

As a result of the above, you indicate that Xco's U.S. income tax liability in respect of this gain arises in a "different year" than its Canadian income tax liability (i.e., December 31, 20X0 vs. November 30, 20X1). However, to the extent that Xco's share of the capital gain subject to tax in Canada is sourced in the U.S., it is your view that a foreign tax credit for any non-business-income tax paid by Xco for its U.S. taxation year that ends on December 31, 20X0 can be claimed by Xco in its November 30, 20X1 taxation year as a foreign tax paid for that year.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following general comments.

It is our view that in interpreting the term "for the year" as it is used in subsections 126(1) and 126(2), as well as in the definitions of "business-income tax" and "non-business-income tax" in subsection 126(7) of the Act, that term relates to the year for which the foreign income or profit tax is exigible (i.e. liable to be paid). In other words, it relates to the year for which the taxpayer is liable to pay tax to the foreign jurisdiction for the income which is considered to have been earned under the tax law of the foreign jurisdiction (the "taxable year"). As noted in paragraph 13 of IT-270R2, the foreign income or profit tax may actually be paid before or after the taxable year but as long as it is paid for the taxable year, subject to the relevant carryover provisions for business-income tax, such tax is eligible to be claimed as a foreign tax credit, for Canadian tax purposes, for a taxation year if such taxation year for which the person is making the claim coincides with the taxable year.

In the situation described above, the income tax paid to the U.S. by Xco for the year in which the capital gain arises (20X0) will not be considered to be paid for the year the capital gain is reported in Canada (20X1). As a result, and subject to our comments below, the income tax so paid to the U.S. by Xco for the year of recognition for U.S. tax purposes (i.e., 20X0) will, in our view, only be creditable in Canada for foreign tax credit purposes for Xco's 20X0) taxation year.

Notwithstanding the above, based on the administrative position described in our response to Q4 in the 1989 Canadian Tax Foundation Roundtable, where the taxpayer's Canadian and foreign taxation years do not coincide a portion of the foreign taxes may be prorated. In the above situation, Xco would only be able to allocate 1/12th of the year 20X0 U.S. income taxes (along with 11/12ths of its 20X1 U.S. taxes paid) as foreign taxes paid for its November 30, 20X1 taxation year.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

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