26 September 2001 External T.I. 2001-0094025 - Part-year Residents, Credits

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:

1) Will a part-year resident's income during the non-resident period affect the credits that he or she can claim in the computation of taxes under Part I of the Act?

2) Will certain credits transferred from a part-year resident taxpayer's spouse have to be prorated if the credits have already been prorated in the computation of amounts eligible for transfer from the taxpayer's spouse?

Position: 1) Yes. 2) No.

Reasons:

1) If section 118.94 applies, certain credits will be denied where certain income tests are not satisfied.

2) A reasonable proration is required under the subparagraph 118.91(b)(ii) of the Act. From a policy perspective, there is no reason to have a second proration of an amount that has already been prorated for the non-resident period. The Returns Processing and Compliance Section of the International Tax Directorate has confirmed that they require only one proration when they apply the provision.

XXXXXXXXXX 2001-009402
M. P. Sarazin, CA
September 26, 2001

Dear XXXXXXXXXX:

Re: Non-Refundable Tax Credits and Part-Year Residents

This is in reply to your letter of July 13, 2001, requesting our views regarding the application of section 118.91 of the Income Tax Act (the "Act") to part-year residents. You have asked us to comment in respect of the following two questions.

Question #1

With respect to the non-resident period in a year, can a part-year resident claim a credit described in sections 118 to 118.9 even if the part-year resident had no Canadian source income for the non-resident period?

Response

Section 118.91 restricts the credits that may be claimed by part-year residents under sections 118 to 118.9 of the Act. In addition, section 118.94 does not permit a non-resident to claim any credits under sections 118, 118.2, 118.6, 118.8 and 118.9 and subsections 118.3(2) and (3) unless all or substantially all of the individual's income for the non-resident period is included in computing the individual's taxable income earned in Canada for the non-resident period.

Paragraph 118.91(a) deals with the credits allowed for the period that the part-year resident was not resident in Canada and the credits allowed thereunder are computed as though the non-resident period was a whole taxation year. Paragraph 118.91(b) deals with the credits allowed for the period that the part-year resident was resident in Canada and the credits allowed thereunder are computed as though the resident period was a whole taxation year as well. The post amble to section 118.91 also restricts the credits under any of the provisions in the Act to the maximum that could be claimed by the individual had the individual been resident in Canada throughout the year.

In determining whether a credit described in sections 118 to 118.9 of the Act could be claimed by a part-year resident for the non-resident period during which the part-year resident had no Canadian source income, we would have to consider the application of section 118.94 of the Act. The particular part-year resident would not be able to claim any of the credits listed in section 118.94 for the non-resident period because all or substantially all of his or her income for the non-resident period would not be included in computing the individual's taxable income earned in Canada for the non-resident period. For instance, the part-year resident would not be entitled to the medical expense credit under section 118.2 for the non-resident period because it is restricted under section 118.94 of the Act whereas the part-year resident would be entitled to the tuition credit under section 118.5 because it is not restricted under section 118.94 of the Act.

Question #2

Section 118.8 allows for the transfer of unused credits from a taxpayer's spouse. Where the spouse is a part-year resident, the credits allowed will be computed under paragraph 118.91(b) of the Act. The credits allowed under subparagraph 118.91(b)(ii) of the Act are allowed on a pro rata basis for the resident period. Consequently, unused credits eligible for transfer from the taxpayer's spouse are the prorated amounts. Where the amounts eligible for transfer from a taxpayer's spouse have already been prorated, does a part-year resident have to prorate the amount claimed under section 118.8?

Response

In our opinion, an unused credit which has already been computed on a prorated basis that is eligible to be transferred to a taxpayer's spouse does not have to be prorated a second time when the spouses became residents of Canada on the same day. However, there may be situations where a partial proration may be required where the spouses become residents of Canada at different times in a taxation year. The determination of what would be a reasonable proration for the purposes of subparagraph 118.91(b)(ii) would have to be determined based on the facts of the case.

We trust these comments will be of assistance.

Yours truly,

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