1 October 2008 External T.I. 2006-0174701E5 - FTC for 75(2) trust paid by settlor-beneficiary

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: Assuming that subsection 75(2) applies notwithstanding proposed paragraph 75(3)(c.2) and that income is attributed to a resident of Canada from a non-resident trust which is not deemed resident under current 94(1)(c) (because of the exemption for the first 4 years after becoming resident in Canada), will the taxpayer be entitled to a deduction under 20(11) and\ a foreign tax credit under 126(1) in respect of the foreign taxes paid by the non-resident trust?

Position: Question of fact but assuming that:

•the taxpayer is resident in Canada;
•the taxpayer pays the foreign (US) tax directly because of the US tax rules governing grantor trusts;
•the trust is not resident in Canada under common law principles and will not be deemed to be resident in Canada under 94(1)(c) during the "immigrant period" -typically the 4 years following immigration when the taxpayer has not been resident in Canada for 60 months before the end of the tax year (and assuming, contrary to expectations, that 75(2) will apply notwithstanding proposed 75(3)(c.1));
•the income earned by the property is on US marketable securities which is not taxable Canadian property or real property;

a reasonable argument can be made that the taxpayer would be entitled to a deduction under 20(11) for amounts in excess of 15% of the foreign taxes paid and under 20(12) for any portion of the 15% so desired. To the extent that the taxpayer does not claim a deduction under 20(12), a foreign tax credit would be allowed under 126(1) in respect of the 15%

Reasons: Questions such as these are highly fact dependant; however, this position is consistent with the position taken in 2007-023370 and 2002-0143605

XXXXXXXXXX 								2006-017470
									Annemarie Humenuk
Attention:  XXXXXXXXXX 

October 1, 2008

Dear XXXXXXXXXX :

Re: Foreign Tax Credit with respect to Income Attributed from a Non-Resident Trust

This is in reply to your letter of March 1, 2006, in which you ask whether a Canadian resident who pays foreign income tax on income that is attributed to him under subsection 75(2) would be entitled to a foreign tax credit or deduction under either subsection 20(11) or (12) in respect of the foreign taxes so paid by that individual. We apologize for the delay in our response.

You describe a scenario under which a U.S. citizen immigrates to Canada having previously established a U.S. grantor trust. The U.S. grantor trust is resident in the U.S. and invests solely in property that is not taxable Canadian property and is not real estate. Under the U.S. tax legislation, the income from the trust's investments is reported on the individual's U.S. income tax return and the individual pays U.S. income tax on that income. For the first four calendar years following the individual's immigration to Canada, the grantor trust is not deemed resident in Canada under either paragraph 94(1)(c) or proposed subsection 94(3) because the individual, as the sole contributor of property to the trust, has not been resident in Canada for more than 60 months by the end of the taxation year. For the purpose of your question, you ask us to assume that proposed paragraph 75(3)(c.2) does not apply and that the income from the non-resident trust is properly included in the Canadian resident's income under subsection 75(2).

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.

Paragraph 3 of Interpretation Bulletin IT-506, Foreign Income Taxes as a Deduction From Income, outlines the various options for claiming a deduction or tax credit in respect of foreign taxes paid on foreign income that is included in a taxpayer's income. For the purposes of computing the income to be attributed under subsection 75(2), the income from the trust's property is computed at the trust level. In the situation you describe, no amount of foreign tax is paid by the trust and as such, the full amount of the income is attributed to the individual. Any deduction available to the individual under subsection 20(11) or 20(12) for foreign taxes paid by that individual in respect of the income attributed to that individual under subsection 75(2) is subject to the test imposed by the preamble to subsection 20(1) which provides that:

"..there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto:"

While it is evident from the wording of subsection 20(1) that there must be a clear connection between the amount sought to be deducted under either subsection 20(11) or 20(12) and the foreign taxes paid, it seems clear that this connection would be met in the situation you describe. According, the individual resident in Canada would presumably be entitled to a deduction for foreign tax paid to the extent provided by subsection 20(11) and 20(12). For more details on the computation of the maximum amount that can be deducted under these provisions, we refer you to Interpretation Bulletin IT-506.

Likewise, a foreign tax credit may be available in respect of any amount not deductible under subsection 20(11) or deducted under subsection 20(12) to the extent permitted in Interpretation Bulletin IT-270R3, Foreign Tax Credit. Thus in the situation you describe, and assuming that the income earned by the trust is the sole property income earned by the individual from the U.S., and the individual's Part I rate of income exceeds 15%, one would reasonably expect the individual to be entitled to a 15% foreign tax credit in respect of the foreign tax paid by the individual on U.S. property income (other than real estate) that is attributed to that individual under subsection 75(2), and that any balance of tax payable would be deductible under subsection 20(11). While the individual would be entitled to claim a deduction under subsection 20(12) for the 15% of foreign taxes not deductible under subsection 20(11), any amount claimed under subsection 20(12) would reduce the amount of the foreign tax credit available under subsection 126(1).

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
Legislative Policy and Regulatory Affairs Branch