3 September 2003 External T.I. 2003-0025105 - FTC - Qualifying Income 111(1)(a)

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 utilization of a carried forward non-capital loss reduce a taxpayer's qualifying income as defined in subsection 126(9)?

Position: No

Reasons: The "qualifying income" defined in subsection 126(9) refers to the income as opposed to taxable income. The carried forward losses are deductible from the taxable income (paragraph 111(1)(a)). Consequently, the foreign business income that must be considered in the calculation of the FTC is not reduced by carried forward non-capital losses.

XXXXXXXXXX 									2003-002510

Attn: XXXXXXXXXX

September 9, 2003

Dear XXXXXXXXXX:

Re: Foreign Tax Credit

We are writing in response to your email of June 19, 2003, wherein you requested our opinion regarding the application of the foreign tax credit under subsection 126(2) of the Income Tax Act (Canada) (the "Act") to the following situation:

? A Canadian company (Canco) has Canadian source and Korean source business income.

? In 1999, Canco incurred CDN$150,000 tax in Korea on its Korean business income.

? As there was no Canadian Tax Otherwise Payable ("CTOP"), this unused foreign tax credit was carried forward.

? No section 110.5 addition to taxable income was made.

? Canco incurred significant losses in Korea in 2000 and used them to offset Korean taxable income in 2001 and 2002.

? In 2002, Canco had significant taxable income in Canada, and would like to use the 1999 Korean tax to reduce the Canadian taxes in 2002.

Your Question

Does the utilization of a carried forward Korean non-capital loss against 2002 Korean business income preclude the taxpayer from claiming a FTC in Canada in 2002?

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments which may or may not apply to your situation.

Subsection 126(2) allows a taxpayer to claim a foreign tax credit for the foreign business income tax paid by the taxpayer in the foreign country. In cases where the foreign business-income tax paid exceeds certain limits, the excess foreign tax can be carried forward for seven years or carried back for three years. Subsection 126(2) provides that the lesser of the following three amounts can be deducted in a particular year:

1. Paragraph 126(2)(a): such part of the total of the business-income tax paid by the taxpayer for the year in respect of business carried on by the taxpayer in the country and the taxpayer's "unused foreign tax credit" in respect of the particular country as defined in subsection 126(7).

2. Paragraph 126(2)(b) and subsection 126(2.1): An amount generally calculated as follows:

CTOP
X
Foreign net business income ("qualifying income") in the particular country

Total income less certain deductions

(Note that this formula applies for the year in which the unused foreign tax credit is to be used)

3. Paragraph 126(2)(c): The CTOP less any amount deducted under subsection 126(1).

In your situation, you want to know if the foreign net business income in Korea for the year 2002 (the numerator in the subsection 126(2.1) formula) is computed without deducting non-capital losses (i.e. in respect of the Korea business) claimed in 2002 under paragraph 111(1)(a).

The numerator in subsection 126(2.1) refers to the term "qualifying income" which is defined in 126(7), which in turn refers to subsection 126(9). The notion of "qualifying income" in subsection 126(9) refers to the net income under Part I as opposed to taxable income. However, the qualifying income shall be computed without "any portion of income that was deductible under subparagraph 110(1)(f)(i) [... or ] under section 110.6", or without any "tax-exempt income". This means that a taxpayer has to deduct, in computing the qualifying income, certain amounts that are included in the net income under Part I, which are only deductible in computing taxable income. Subparagraph 110(1)(f)(i) relates to amounts of an individual exempt from income tax in Canada because of a tax treaty, and section 110.6 relates to capital gain exemption. The expression "tax-exempt income" is defined in subsection 126(7) and means income that is treaty-exempt in the foreign country.

Subsection 126(9) does not provide that the qualifying income should be computed without the portion of the income that was offset by a deduction for a loss carried forward under paragraph 111(1)(a). Paragraph 111(1)(a) is a deduction in computing the taxable income and, since 126(9) does not provide for it directly, this deduction does not affect the computation of the qualifying income for the year. In your situation, the qualifying income of Canco for 2002 should not be reduced by the 2000 loss claimed in 2002.

To conclude, it is our view that the deduction of the 2000 non-capital loss in computing taxable income in 2002 does not preclude Canco from claiming the 1999 unused foreign tax credit in the year 2002. However, we observe that the deduction of non-capital loss would reduce the CTOP. Therefore, the limits in paragraph 126(2)(b) and (c) would be affected.

We trust our comments are helpful.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International Section
Income Tax Rulings Directorate
Policy and Legislation Branch