25 July 2007 Internal T.I. 2007-0230831I7 - OETC and FTC

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: Whether an individual can claim a partial OETC to increase the FTC that the individual may claim to reduce income tax otherwise payable for a taxation year.

Position: No.

Reasons: The use of the words "equal to" in subsection 122.3(1) of the Act supports the conclusion that an individual must claim all of the OETC available for a taxation year or none of the OETC available for a taxation year.

								July 25, 2007

Lise Lucie Roy						HEADQUARTERS
Publications						A. Seidel, CMA
Individual Information Section			(613) 957-2058
Tax Information Division
Taxpayer Services and Debt Management Branch
								2007-023083

OETC and FTC

We are writing in response to your April 11, 2007 e-mail in which you requested our comments concerning the computation of an individual's income tax payable for a taxation year in which the individual has employment income that is eligible for the overseas employment tax credit ("OETC") and the individual has paid income or profits tax to a country other than Canada on such income that would enable the individual to claim a foreign tax credit ("FTC").

Issue

You are aware that an OETC claim reduces the amount of the FTC available to a taxpayer under subsection 126(1) of the Act. If a taxpayer chooses to claim an OETC, you query whether the individual must claim a full OETC or whether the individual can choose to claim a reduced OETC in order to increase the FTC available to the individual to reduce the income tax payable for a taxation year.

Our Comments

Where all of the requirements of section 122.3 of the Act are satisfied, subsection 122.3(1) of the Act provides that a taxpayer may deduct, from the amount that would be the individual's tax payable for the year, the amount computed in accordance with that subsection. The provision specifies that the amount that a taxpayer may deduct is "equal to" the amount computed in accordance with that subsection.

To ensure that an individual does not claim both the OETC and the FTC in respect of the same income, paragraph (f) of the definition of "non-business-income tax", as defined in subsection 126(7) of the Act, excludes the tax, or portion of the tax, "that, where the taxpayer deducted an amount under subsection 122.3(1) from the taxpayer's tax otherwise payable under this Part for the year, may reasonably be regarded as attributable to the taxpayer's income from employment to the extent of the lesser of the amounts determined in respect thereof under paragraphs 122.3(1)(c) and (d) for the year" from an individual's non-business-income tax and subclause 126(1)(b)(i)(E)(II) of the Act reduces an individual's income from employment in the relevant country by the lesser of the amounts determined in respect thereof under paragraphs 122.3(1)(c) and (d) for the year where the individual has chosen to claim an OETC to ensure such employment income does not increase the individual's FTC in respect of other foreign taxes paid.

Based upon the wording in subsections 122.3(1) of the Act, it is clear that the OETC is a permissive deduction. Therefore, in any taxation year in which an individual has both an OETC and a FTC available, the individual will be entitled to choose whether or not he/she will reduce any income tax otherwise payable using the OETC first and then determine the amount of a FTC, if any, or whether the individual will only claim a FTC. However, because subsection 122.3(1) of the Act specifies that a taxpayer must deduct the amount "equal to" that computed, it is our view that an individual is not entitled to reduce any income tax otherwise payable by deducting only a portion of the OETC available for a taxation year in order to increase the FTC available for a taxation year. It is therefore our view that the only choice that an individual has is to claim the entire OETC available to reduce any income tax otherwise payable or not to claim the OETC at all. Nevertheless, even if a partial OETC claim were possible, it does not appear that the amount of the FTC available would be any greater by virtue of such partial claim. This is so because the FTC limiting provisions in both paragraph (f) of the definition of "non-business-income tax" in subsection 126(7) of the Act and in subclause 126(1)(b)(i)(E)(II) of the Act modify the FTC computation by the lesser of the amounts referred to in paragraphs 122.3(1)(c) and (d) of the Act regardless of what portion of the OETC is actually claimed.

We hope that our comments are of assistance. If you wish to discuss any of the above, please contact the writer.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch