Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: In a given fact situation, a CCPC's foreign tax for a given year is classified as non-business-income tax even though the income in respect of which the tax is exacted is business related. The CCPC also has income for the given year from a source in Canada that is a property. In the calculation of the CCPC's RDTOH, should we interpret the subparagraph 129(3)(a)(i) in a manner that only foreign tax deducted under 126(1) related to "income" as defined in subsection 129(4) would be considered?
Position: No. The total amount of the foreign tax deducted under subsection 126(1) should be considered.
Reasons: The Act.
2004-009202
XXXXXXXXXX Guy Goulet, CA, M. Fisc,
(613) 957-9768
November 8, 2004
Dear Sir,
Subject: Interrelationship between foreign tax credits in respect of non-business income and refundable dividend tax on hand:
This is in response to your letter of August 19, 2004 requesting our comments on the interrelationship between foreign tax credits in respect of non-business income and refundable dividend tax on hand ("RDTOH").
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
In your letter, you described a particular situation that, in your view, leads to an inequitable result in the calculation of the RDTOH under subsection 129(3). You reminded us that the RDTOH is calculated, inter alia, in respect of the aggregate investment income ("Aggregate Investment Income") earned by a Canadian-controlled private corporation ("CCPC"). Aggregate Investment Income is defined in subsection 129(4) and includes, inter alia, income for the year from a source that is property in or outside Canada. An adjustment to the RDTOH is provided for in subparagraph 129(3)(a)(i) to take into account the foreign tax credit deducted in respect of non-business-foreign-income ("Subsection 126(1) Foreign Tax Credit"). In your view, this adjustment is necessary to prevent a taxpayer who has already received a foreign tax credit in respect of, for example, income from property abroad from obtaining, in addition, a refund of part of the Canadian tax otherwise paid through the RDTOH mechanism. However, you are of the view that this adjustment may cause inequitable results where the Subsection 126(1) Foreign Tax Credit relates to income that does not fall within the definition of Aggregate Investment Income and income as defined in subsection 129(4) ("Income").
To illustrate this issue, you presented us with a situation where a CCPC ("the Corporation") derives its income for a given taxation year from two sources, namely, income from a source that is property situated in Canada and income from a source that is a business carried on in Canada. The business carried on in Canada by the Corporation is the creation of intangible property. These intangible assets generate foreign royalties to the Corporation ("Foreign Royalties"). In the particular taxation year, the Corporation pays tax to a foreign government in respect of the Foreign Royalties.
You indicated that the foreign tax paid on the Foreign Royalties does not qualify for the foreign business income tax credit provided for in subsection 126(2) since this tax would constitute non-business income tax ("Foreign Tax") within the meaning of the definition of that term in subsection 126(7), since such business income is not considered to be income from a business carried on outside Canada (for Canadian tax purposes, Foreign Royalties are considered to be income from a business carried on in Canada). However, this tax entitles the Corporation to the Foreign Tax Credit under subsection 126(1).
The inequitable result you are concerned about is that the subsection 126(1) foreign tax credit obtained by the Corporation in respect of its Canadian business income reduces its subparagraph 129(3)(i) RDTOH and thus causes the Corporation's Canadian property income to be subject to a higher rate of Canadian tax than it would otherwise be.
You wish to know whether, for the purposes of the adjustment to RDTOH under clause 129(3)(a)(i)(A), it is possible to interpret that only the portion of the subsection 126(1) Foreign Tax Credit relating to Aggregate Investment Income or Income is considered.
Our Comments
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not be fully applicable in a particular situation.
The result you described in the situation submitted appears to us to be consistent with the text of the Act. We note, however, that a different result could be obtained if the Corporation claimed a deduction under subsection 20(12) in computing its business income for the particular taxation year of an amount not exceeding the Foreign Tax it would have paid for the year. In such a situation, any amount so deducted by the Corporation would reduce the Foreign Tax Credit under subsection 126(1) and thus no longer affect the calculation of its RDTOH.
However, as you know, the CRA's mandate is to administer the Act while the responsibility for developing tax policy and amending the Act rests with the Department of Finance. If you wish to make representations concerning amendments to the Act, you may send your comments to the Department of Finance, Tax Policy Branch, Tax Legislation Division, L'Esplanade Laurier, 140 O'Connor Street, 17th Floor, East Tower, Ottawa, Ontario, K1A 0G5.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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