20 December 2002 Internal T.I. 2002-0161767 - UK Inheritance tax and foreign tax 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does the Income Tax Act or the Canada - U.K. Convention provide relief to a resident of Canada who upon death pays inheritance tax to the U.K. based upon the fair market value of the resident's rental property situated in the U.K.?

Position:     			No.

Reasons: Subsections 126(1), 126(2) 20(11), and 20(12) do not provide relief because the foreign inheritance tax is not an income or profits tax.

XXXXXXXXXX 2002-016176
Gilles L. Gosselin
December 20, 2002

Dear Sirs:

Re: United Kingdom Inheritance Tax and Foreign Tax Credits in Canada

We are writing in response to your letter dated July 17, 2002, to the Canada Customs and Revenue Agency (the CCRA), Hamilton Tax Services Office. We were asked to respond to your letter because our Directorate is responsible for, among other things, responding to external technical tax enquiries. For a complete explanation of the services that we provide please see Information Circular 70-6R5, May 17, 2002, Advance Income Tax Rulings, which can be viewed at http://www.ccra-adrc.gc.ca/ by following the "forms and publications" link.

Regarding your request, it is our policy not to provide written technical interpretations regarding specific transactions such as those in your letter. However, we will provide some general comments regarding the issues raised in your letter.

You would like to know if the Income Tax Act (Canada)(the "Act") provides relief to a resident of Canada who upon death pays inheritance tax to the United Kingdom where the amount of the tax is based upon the fair market value of the resident's capital property situated in the United Kingdom. You are aware that in Canada, pursuant to subsection 70(5) the Act, a taxpayer is deemed to have disposed, immediately before death, of each capital property of the taxpayer for proceeds of disposition equal to the fair market value of each property at that time. Pursuant to sections 3 and 38(a) of the Act, in order to determine taxable income, the taxpayer must then include in income a taxable capital gain that is equal to 1/2 of the fair market value of each property less the cost of each property (the 1/2 tax base is 3/4 for a taxation year that ended before February 28, 2000, and 2/3 for a taxation year that began after February 28, 2000 and ended before October 17, 2000).

A Canadian taxpayer cannot reduce tax payable in Canada by any inheritance tax paid in the United Kingdom because the inheritance tax is not an "income or profits tax", as required in Canada for determining foreign tax credits or deductions from income for taxes paid to a foreign government.

Generally, subsection 126(1) of the Act provides a tax credit in Canada for "income or profits tax" on non-business income paid to a foreign government and subsection 126(2) provides a tax credit for "income or profits tax" on business income paid to a foreign government. As an alternative to claiming a subsection 126(1) foreign tax credit, the Act also permits, pursuant to subsection 20(12), "income or profits tax" on non-business income to be deducted in computing a taxpayer's income. Also, subsection 20(11) provides that where an individual earns income from a "property" other than real property from a source outside Canada, the individual may deduct from income the part of any "income or profits tax" paid to a foreign government in excess of 15% of the income from the property.

Accordingly, the tax credits and deductions provided in subsections 126(1), 126(2) 20(12), and 20(11) do not apply to the inheritance tax paid in the United Kingdom because the inheritance tax is based upon the value of a property situated in the United Kingdom at the time of the resident's death and the tax is not a tax on "income or profits". Also, as you already know, the Canada - United Kingdom Income Tax Convention does not apply to the inheritance tax, pursuant to subparagraph 1(b) of Article 2.

We hope that our comments are of assistance. If you have any questions or comments relating to any of the matters discussed herein, please do not hesitate to contact the writer at (613) 946-3553.

Yours truly,

for Director
International Division
Income Tax Rulings and
Interpretations Directorate