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: How should foreign tax credits be calculated on capital gains realized on the sale of bonds?
Position: In accordance with the rules set out in section 126 of the Act.
Reasons: Section 126 sets out the rules for the calculation of foreign tax credits.
D. Zhang
XXXXXXXXXX (613) 957-2104
2007-025171
September 20, 2007
Dear XXXXXXXXXX,
Re: Foreign Tax Credit Calculation
We are writing in response to your letter of September 11, 2007, in which you requested our comments regarding the calculation of foreign tax credits associated with the gain realized on the sale of foreign government bonds.
For the purpose of responding to your query, we assume that you are not carrying on business in the foreign country as a result of your bond-trading activities. In addition, we assume that the gains realized on the disposition of the bonds are properly characterized as capital gains for Canadian tax purposes.
The situation outlined in your letter appears to relate to a factual one. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
Subsection 126(1) of the Income Tax Act governs the calculation of foreign tax credits on non-business income (including capital gains). In general terms, subsection 126(1) limits the amount of the credit for a particular taxation year to the lesser of the amount of actual non-business-income tax paid for the year to the particular foreign country and the portion of Canadian tax otherwise payable for the year that relates to the non-business income for the year from sources in that country. For a detailed discussion on the calculation and related issues, we refer you to IT-395R2 "Foreign Tax Credit - Foreign-Source Capital Gains and Losses" and IT-270 R3 "Foreign Tax Credit", copies of which are enclosed.
We trust that these comments are of assistance.
Yours truly,
Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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