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: Is US tax paid by a Canadian-resident individual with respect to his limited partnership interest in a US limited partnership that carries on business in the US considered non-business-income tax and deductible under s.20(12) of the Income Tax Act ("ITA")?
Position: No
Reasons: Assuming that the US limited partnership is considered to be a partnership for Canadian tax purposes, all partners, including the limited partner, is considered to carry on the business of the partnership. S.96(1)(f) of the ITA applies such that the Canadian-resident partner's share of the partnership's business income is also business income in the partner's hands. Thus, US tax paid by the partner in respect of his share of the partnership's business income is business-income tax and not non-business-income tax.
Institute of Chartered Accountants of British Columbia ("ICABC") - CCRA Meeting, July 18, 2002
Question Submitted by the ICABC
Foreign Tax Deductions
Are foreign taxes paid with respect to a non-resident partnership interest considered non-business income taxes and fully deductible under ITA 20(12)?
Facts:
? Taxpayer X, is a limited partner in a US partnership, Y.
? Y earns income from rental real estate in the United States.
? X is required to pay US tax on his share of Y's income.
? X is a resident of Canada.
Taxpayer's Arguments:
? Business income tax is defined in ITA 126(7), to be tax in respect of the income of the taxpayer from a business carried on by the taxpayer in the business country.
? While a partner of a Canadian partnership is deemed to be carrying on a business in Canada by virtue of ITA 96(1.6), there is no corresponding deeming provision for a partner of a non-Canadian partnership. Therefore, we cannot say that a Canadian partner of a US partnership is carrying on business in the US.
? However, as per ITA 96(1)(f), the income from a partnership retains its character. Since the US partnership is earning business income, X is considered to be earning US business income.
? If the tax is not business income tax, then it is non-business income tax (even if the income is still business income. (IT-506, paragraph 10)).
? ITA 20(11) allows a deduction for the portion, if any, of the foreign tax that exceeds 15% of the gross income for the year from the particular property.
? X is earning business income from Y, so ITA 20(11) is not applicable.
? ITA 20(12) allows a deduction for non-business income tax to the extent that a foreign tax credit under ITA 126 is not claimed and a ITA 20(11) deduction is not claimed.
? Since no deduction has been taken under ITA 20(11), and since no foreign tax credit has been claimed, the full amount of US taxes should be deductible under ITA 20(12).
? The wording in ITA 20(11) and ITA 20(12) does not state that the deduction cannot exceed the income from the business or property; therefore, if no foreign tax credit is claimed, the full amount of foreign taxes should be deductible under ITA 20(11) and/or ITA 20(12).
Taxpayer's Conclusion:
? X should be able to claim a deduction under ITA 20(12) for the full amount of non-business income tax paid to the US.
? If the US taxes exceed the income included on the Canadian return, the amount of the ITA 20(12) should not be limited to that foreign income.
CCRA's Response
Subsection 20(12) of the Income Tax Act ("ITA") provides that an individual taxpayer may claim a deduction in computing the taxpayer's income for a taxation year from a business or property, not exceeding the non-business-income tax paid by the taxpayer for the year to the government of a country other than Canada (within the meaning assigned by subsection 126(7) with certain modifications) in respect of that income.
Pursuant to subsection 126(7) of the ITA, non-business-income tax does not include any income or profits tax paid by the taxpayer to a government of a country other than Canada that was included in computing the taxpayer's business-income tax for the year in respect of any business carried on by the taxpayer in any country other than Canada. Business-income tax is defined in subsection 126(7) to mean the portion of any income or profits tax paid by the taxpayer to a government of a country other than Canada that can reasonably be regarded as tax in respect of the income of the taxpayer from a business carried on by the taxpayer in a country other than Canada.
Consistent with the jurisprudence (see The Queen v. Robinson Trust et al, 98 DTC 6065 (FCA); Grocott v. The Queen, 96 DTC 1025 (TCC)), it is the Agency's long-standing position that all partners, including limited partners, of a limited partnership carry on the business of the partnership, even though the limited partners took no part in the management of the business. Accordingly, assuming that the US limited partnership, Y, is a partnership for Canadian tax purposes, that is, it is a relationship between persons carrying on a business in common with a view to profit, and that Y is carrying on a business in respect of its rental real estate in the US, we would also consider X, the limited partner to be carrying on a business in the US.
Subsection 96(1.6) of the ITA is a provision that deals only with a taxpayer who has ceased to be a member of a partnership that carries on business in Canada but continues to receive income from the partnership, who may not otherwise be considered to be carrying on the business of the partnership under common law principles since the taxpayer has ceased to be a member of the partnership. The fact that subsection 96(1.6) does not apply to a partnership that does not carry on business in Canada does not mean that a taxpayer who is still a member of such a partnership is not carrying on the business of the partnership under common law principles.
In addition, paragraph 96(1)(f) of the ITA would apply such that X's share of Y's income has the same source as it has when earned by Y, that is, income from a business carried on in the US.
Based on the above, we would consider the US tax paid by X on his share of Y's income to be tax in respect of the income of X from a business carried on by X in the US. Therefore, such tax is business-income tax and not non-business-income tax such that X would not be entitled to a deduction under subsection 20(12) of the ITA with respect to such tax nor would X be entitled to a foreign tax credit under subsection 126(1) of the ITA with respect to such tax. In addition, assuming that Y is earning business income from its rental real estate in the US, we agree that no deduction under subsection 20(11) of the ITA is available to X with respect to the US tax he pays on his share of Y's income since such tax is tax paid in respect of income from a business rather than income from a property, by virtue of paragraph 96(1)(f) of the ITA. However, X may be entitled to claim a foreign tax credit under subsection 126(2) of the ITA subject to the limitations set out in section 126 of the ITA.
It should be noted that in the event that X cannot utilize his US business income taxes paid for a year against his Canadian federal tax otherwise payable for the year, subsection 126(2) of the ITA does provide for a 7-year carry-forward of unused foreign tax credits. In addition, where X is a corporation, X would be able to take advantage of the provisions of section 110.5 of the ITA.
Presenter: Robert Thomson, International Tax Advisor, Pacific Region
Prepared by: Sabrina Wong, Income Tax Rulings Directorate
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