29 May 2007 STEP Roundtable Q. 6, 2007-0233701C6 - Foreign Tax Credit

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: In circumstances where subsection 75(2), 56(4.1), 74.1(1) or 74.1(2) of the Act attribute foreign non-business income earned by a trust to a person who contributed property to the trust, does any foreign non-business income tax paid by the trust also attribute to that person for purposes of subsection 126(1), subsection 20(11) or subsection 20(12) of the Act.

Position:	Subsection 126(1) of the Act --- No.
		Subsection 20(12) of the Act --- question of fact.
		Subsection 20(11) of the Act --- Yes.

Reasons:	Subsection 126(1) of the Act --- trust pays tax, not the person to whom income is attributed, so no foreign tax credit to person.
		After December 20, 2002, subsection 20(12) of the Act requires that the person claiming the deduction be a resident of Canada.
		Subsection 20(11) of the Act does not have a residency requirement. 

2007 Step Conference - Question 6

Where:

(a) a Canadian inter-vivos revocable trust is created in such a manner that subsection 75(2) of the Act applies to attribute the income earned by the trust from certain property to be income of the transferor and not income of the trust;

(b) property is contributed to a trust and the anti-avoidance rule in subsection 56(4.1) of the Act applies to deem the income earned on the property to be the income of the transferor and not income of the transferee;

(c) the attribution rule in subsection 74.1(1) of the Act applies to an individual that has transferred property, by means of a trust, to or for the benefit of the individual's spouse or common-law partner, such that the income earned by the trust from the property is deemed to be the income of the individual and not income of the spouse or common-law partner; or

(d) the attribution rule in subsection 74.1(2) of the Act applies to an individual that has transferred property to a trust, to or for the benefit of a related minor, such that any income earned by the trust from the property is deemed to be the income or loss of the individual and not the minor; and

in each case above the portion of the income earned by the trust, that is attributable to such property, is foreign non-business income that is attributed to the person who contributed the property to the trust. However, it is the trust that pays any foreign non-business income tax on any such non-business income earned by the trust.

Question

Does the foreign non-business income tax paid by the trust also attribute to the person that is deemed to have received the foreign non-business income earned by the trust or does it remain in the trust where, because of attribution the trust does not have any foreign non-business income, it will not be creditable? In such circumstances, is the foreign non-business income tax deductible under subsections 20(11) or 20(12) of the Act by the person who contributed the property to the trust?

Response

There is no mechanism in any of subsections 75(2), 56(4.1), 74.1(1) or 74.1(2) of the Act that would allow the foreign non-business income tax paid to the government of a foreign country by the trust to be viewed as having been paid by the person who must report the attributed income (the "Transferor"). Subsection 126(1) of the Act requires that any non-business income tax must have been paid by the taxpayer claiming the foreign tax credit. Since it is the trust that paid the tax, the Transferor is not eligible for such a credit.

For the purposes of subsections 75(2), 56(4.1), 74.1(1) or 74.1(2) of the Act, the income from property of a trust is computed at the trust level. The deductions permitted under subsections 20(11) and 20(12) of the Act may be claimed in computing such income from property. Therefore, if the trust is resident in Canada, and the requirements for the application of those provisions are otherwise satisfied, deductions under both subsection 20(11) and subsection 20(12) of the Act may be claimed in computing the amount attributed to the Transferor.

A proposed amendment to subsection 20(12) of the Act, applicable after December 20, 2002, clarifies that the deduction under that provision is only available to a taxpayer that is resident in Canada. Accordingly, no deduction under subsection 20(12) of the Act will be permitted in computing the amount attributable to the Transferor from a non-resident trust after that date.

File # 2007-023370
File # 2007-023371

A. Seidel
May 29, 2007