16 December 2003 External T.I. 2003-0013335 - Qualifying Incomes & Capital Gains

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: Numerator in calculation of "net foreign non-business income" on Form T2209 - does it include capital gains, or taxable capital gains?

Position: Taxable capital gains

Reasons: The starting point in the calculation of "qualifying incomes" is the net income amounts as calculated in accordance with the provisions of the Canadian Income Tax Act.

XXXXXXXXXX 2003-001333
S. E. Thomson
December 16, 2003

Dear XXXXXXXXXX:

Re: Foreign Tax Credit

This is in reply to your fax of April 8, 2003 in which you ask for some assistance with the computation of a foreign tax credit on Form T2209 Federal Foreign Tax Credits. In particular, you have sold some U.S. property, and would like to know if the numerator of the fraction on line 2 entitled "Net foreign non-business income" would include the entire capital gain computed for Canadian income tax purposes, or just the taxable capital gain, which, in 2002, is 50% of the capital gain.

Further, if the numerator referred to above includes only the taxable capital gain, you are concerned that only 50% of the foreign taxes paid will be eligible for a foreign tax credit in Canada.

OUR COMMENTS

The amount "net foreign non-business income" is used on Form T2209 in the fraction:

Net foreign non-business income X Federal tax = ______________
Net income

This formula determines the maximum amount that may be deducted from Canadian tax in respect of foreign non-business income taxes paid to a particular country other than Canada. The term "net foreign non-business income" is not defined in the Canadian Income Tax Act (the "Act"), but rather, is determined in subparagraph 126(1)(b)(i) of the Act. This subparagraph refers to "qualifying incomes from sources in a country", which is computed in accordance with subsection 126(9) of the Act. The starting point to the calculation of qualifying incomes is the net income amounts as calculated in accordance with the provisions of the Act.

Accordingly, the amount to be included in "qualifying incomes", and therefore "net foreign non-business income", is the taxable capital gain, computed in accordance with the Canadian Income Tax Act.

We note that you did not specify the type of U.S. property that you sold. If the gain on the sale of the U.S. property was exempt from U.S. income tax by virtue of the Canada-U.S. Income Tax Convention, and was not subject to an income or profits tax in the U.S. or any other country to which the treaty does not apply, no amount of the gain would be included in the computation of "qualifying incomes". If foreign taxes on the capital gain exceed the amount that may be deducted from Canadian tax pursuant to the above formula, the excess may not be deducted in the current year, nor may it be carried over and deducted in another year.

Regarding your second point, since taxable capital gains are included in both the numerator and the denominator (i.e., net income), the ratio is 1:1. Furthermore, the ratio is applied to Canadian tax otherwise payable, not to foreign taxes paid. Therefore your assumption that only 50% of the foreign taxes paid would be eligible for a foreign tax credit is not necessarily correct.

For more information on the subject, see our Interpretation Bulletin IT-395R2 Foreign Tax Credit - Foreign-Source Capital Gains and Losses located on our website

www.ccra-adrc.gc.ca/E/pub/tp/it395r2/README.html.

We trust we have been of some assistance.

Yours truly,

Olli Laurikainen, C.A., Manager
for Director
International & Trusts Division
Income Tax Rulings Directorate
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