13 July 2004 External T.I. 2003-0049081E5 - FTC beneficiary of Canadian resident trust

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.

Principal Issues: Under U.S. tax rules, it is the beneficiary and not the trust(ee) who pays the tax on income derived from U.S. real property held by a foreign simple trust. Is the beneficiary entitled to a foreign tax credit in respect of the foreign taxes paid on the property income?

Position: As the beneficiary is not entitled to a deduction under 20(11) in respect of the U.S. taxes paid in respect of the real property located in the U.S., the full amount of the taxes will qualify as non-business-income tax, provided that none of (c.1) to (i) of the def'n of non-business-income tax in 126(7) apply.

Reasons: The 104(22) designation does not apply for the purpose of 20(11) such that the beneficiary does not have any foreign source income for the purpose of 20(11). In addition, income from real property is excluded from the application of subsection 20(11).

XXXXXXXXXX 	2003-004908
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

July 13, 2004

Dear Sirs:

Re: Foreign Tax Credit of a Canadian beneficiary of a Canadian Trust

This is in reply to your letter of November 10, 2003, in which you ask for clarification of the calculation of the foreign tax credit available to a Canadian beneficiary of a Canadian trust where it is the beneficiary, and not the trust, who is required to pay the foreign tax payable on the income earned on the U.S. real property owned by the trust. We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You describe the example of a trust resident in Canada that is treated as a "foreign simple trust" for U.S. tax purposes. You state that the trust is not liable to pay any U.S. income tax in excess of the amount withheld under section 1441 of the Internal Revenue Code of the U.S. in respect of the real property located in the U.S. which is held by the trust; however, each beneficiary of the trust is required to file a U.S. tax return and pay income tax on his or her share of the income earned by the trust in respect of the U.S. real estate. In this regard, it is noted that section 871(d) of the Internal Revenue Code allows a non-resident alien who derives income from real property located in the U.S. to elect to treat such income as income which is effectively connected with a business carried on within the U.S. The result of such an election is that no withholding tax is required by the U.S. government and the beneficiaries of the Canadian trust would each be required to pay their share of the U.S. income tax payable in respect of the income derived from the U.S. real property. For Canadian tax purposes, it is the trust that is required to report the income but the trust is permitted to designate its foreign source income to its beneficiaries to the extent provided by subsection 104(22).

A designation under subsection 104(22) deems the beneficiary's income that would otherwise be considered the beneficiary's income from a trust resident in Canada to be the beneficiary's income from the particular foreign source for the purposes of subsections 104(22) and 104(22.1) and section 126. As stated in paragraph 9 of Interpretation Bulletin IT-201R2, Foreign Tax Credit - Trust and Beneficiaries, the designation under subsection 104(22) does not apply for the purposes of any other provision, including subsection 20(11).

As the foreign income taxes paid by the beneficiary are in respect of income from real property, no amount would be deductible under subsection 20(11) in respect of those taxes. As a result, the amount of "non-business-income tax" as determined under subsection 126(7) would not be reduced by an amount determined under paragraph (b) of that definition. Provided that the beneficiary does not deduct any amount of the foreign taxes paid under subsection 20(12) and none of paragraphs (a) or (c.1) to (i) of the definition of non-business-income tax applies to the foreign income taxes paid by the beneficiary, the beneficiary's foreign tax credit will be calculated based on the full amount of income tax paid by the beneficiary to the U.S. in respect of the income designated to that beneficiary under subsection 104(22).

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch