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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues
1. whether tuition and education tax credits not claimed in a year reduce foreign tax credit claim under 126(1)?
2. whether foreign tax credits are taken into account in "C" of the formula in 118.61(1)?
Position
1. No
2. No
Reasons:
1. tuition and education credits are permissive deductions 118.92 provides for the ordering of credits claimed. It does not transform permissive deductions into mandatory deductions.
2. "C" uses "tax payable", not "tax otherwise payable"
October 3, 2001
LONDON TAX SERVICES OFFICE HEADQUARTERS
Appeals Division Denise Dalphy, LL.B.
Attention: Mary Van Roestel
2001-007656
XXXXXXXXXX
Unused Tuition and Education Tax Credits
This is in reply to your memorandum dated March 23, 2001.
Our understanding of the facts is as follows:
1. The taxpayer was a resident of Canada for the years 1998 and 1999.
2. The taxpayer earned non-business income from and paid non-business income tax to a foreign country in 1998.
3. The taxpayer had $XXXXXXXXXX of qualifying tuition and education amounts in 1998.
4. The taxpayer chose to deduct the amounts in paragraph 3 above in 1999, and not in 1998.
Issues
1. Do qualifying tuition and education amounts for 1998 reduce a taxpayer's ability to claim a foreign tax credit if the qualifying tuition and education amounts were not claimed as tax credits in 1998?
2. Will a claim for a foreign tax credit in 1998 reduce the amount of tuition and education amounts for 1998 that can be carried over and deducted in 1999?
Foreign Tax Credit
No.
Subsection 126(1) of the Income Tax Act (the "Act") allows, in very general terms, a taxpayer who was resident in Canada at any time in a taxation year to deduct all or a portion of his or her non-business income tax paid to a foreign country. The amount deductible is restricted by, inter alia, the taxpayer's "tax for the year otherwise payable under this Part [Part I]" in paragraph 126(1)(b) of the Act. Paragraph 126(7)(a) of the Act defines this phrase for the purposes of, inter alia, paragraph 126(1)(b) of the Act. Essentially, "tax for the year otherwise payable under this Part" is the "tax payable under this Part for the year" without reference to certain Division E amounts that are specifically mentioned in either variable A or B in the formula in paragraph (a) of the definition of "tax for the year otherwise payable under this Part" in subsection 126(7) of the Act.
Tuition and education tax credits (in sections 118.5 and 118.6 of the Act, respectively) are permissive, not mandatory, credits that may be deducted in computing tax payable. Subsection 118.5(1) states "For the purpose of computing tax payable under this Part by an individual for a taxation year, there may be deducted..." Subsection 118.6(2) of the Act states: "There may be deducted in computing an individual's tax payable under this Part for a taxation year..."
In our view, while "tax payable" in variable A in the formula in paragraph 126(7)(a) would be the amount computed after tuition and education tax credits have been deducted if the taxpayer in fact deducted them in a particular year, the computation of "tax payable" does not have anything to do with tuition or education credits if they were deductible, but not deducted, in the year. That is, these credits do not affect the computation of a taxpayer's "tax payable" or "tax for the year otherwise payable under this Part [Part I]" if the taxpayer chose not to deduct these credits.
Further, it is our view that, while section 118.92 of the Act provides an ordering rule for credits that a taxpayer has claimed, it does not transmogrify permissive credits into mandatory ones.
As such, if a taxpayer chose not to deduct these credits in a particular year, the credits would not affect the amount of non-business income tax that may be claimed in that year. If however a taxpayer chooses to deduct tuition and education tax credits in a particular year, the credits claimed would reduce his or her "tax for the year otherwise payable under this Part" for foreign tax credit purposes.
Carry-over of Tuition and Education Tax Credits
No.
Variable C in the formula in subsection 118.61 of the Act, whereby a taxpayer's unused tuition and education tax credits at the end of a year are determined is the lesser of variable B in the formula and the "individual's tax payable under this Part for the year if no amount were deductible under section 118.5 or 118.6".
In our view, where a foreign tax credit is claimed in a year, it will reduce an individual's "tax payable" resulting in a smaller amount in variable C, and therefore a smaller reduction to tuition and education tax credits that may be carried over.
We hope this opinion will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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