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: For the purposes of the foreign tax credit, will the amount of U.S. taxes paid on the actual disposition of marketable securities by the deemed resident trust need to be pro-rated to reflect the portion of the taxable capital gain that is subject to tax in Canada under proposed 94(3)(b)?
Reasons: Under the new proposed legislation, the wording of the new legislation makes no reference to the income subject to tax in Canada, thus the full amount of the U.S. taxes paid is creditable subject to the limitations in section 126.
May 28, 2013
Non-resident Trusts and Foreign Investment HEADQUARTERS
Entities Section Income Tax Rulings Aggressive Tax Planning Division Directorate
International and Large Business Directorate Henry Leung
R545-344 Slater St. (613) 957-2129
Ottawa, Ontario K1A 0L5
Attention: Mr. Vardev Singh Dhaliwal
Interaction of Foreign Tax Credits and proposed paragraph 94(3)(b) of the Act:
This is in response to your e-mails of January 25 and January 28, 2013 regarding the amount of foreign tax credits available to the trust (as described below) and the interaction of the availability of the foreign tax credit under subsection 126(1) with proposed subsection 94(3) of the Income Tax Act (Act).
Your enquiry relates to the following facts:
On XXXXXXXXXX, a trust was settled in the U.S. with $10 of cash and marketable securities with an adjusted cost base (ACB) and fair market value (FMV) of $100,000. The trust has a XXXXXXXXXX year-end.
The settlor is also the beneficiary of the trust.
The settlor moved to Canada on XXXXXXXXXX. Due to the condition in subclause 94(1)(b)(i)(A)(III) of the Act, subsection 94(1) did not apply to the trust from XXXXXXXXXX to XXXXXXXXXX. After that period, the trust was deemed to be resident in Canada pursuant to subparagraph 94(1)(c)(i) of the Act. Immediately before being deemed to be resident in Canada, the trust was deemed to have disposed of the marketable securities on XXXXXXXXXX at their FMV pursuant to paragraph 128.1(1)(b) of the Act. On XXXXXXXXXX, the FMV of the marketable securities was $180,000. Under paragraph 128.1(1)(c) of the Act, the trust was then deemed to reacquire the marketable securities at a cost equal to the proceeds of disposition of the property (i.e. $180,000).
The trust disposed of the marketable securities on XXXXXXXXXX for $200,000 and recognized a capital gain of $100,000 ($200,000 - $100,000) for U.S. tax purposes. For its XXXXXXXXXX taxation year, the trust paid $10,000 in U.S. taxes on that capital gain. The capital gain was the only income of the trust for that year.
For Canadian tax purposes, at the time of the actual disposition in XXXXXXXXXX, the trust would have a capital gain of $20,000 ($200K- $180K) or a taxable capital gain of $10,000. The total Part I taxes (based on a 29% tax rate) on the taxable capital gain before taking into account any foreign tax credit is $2,900.
Although the assumed facts would suggest otherwise, we are asked to assume that subsection 75(2) does not apply. It is also assumed that this trust is a discretionary trust.
You ask what amount of foreign tax credit the trust should be entitled to under subsection 94(3) of the proposed legislation released by the Department of Finance on October 24, 2012, which received first reading in the House of Commons on November 21, 2012 as Bill C-48 and second reading on March 8, 2013.
As provided under subsection 126(1) of the Act, the foreign non-business income tax credit is the lesser of:
a) The foreign taxes paid for the year; and
b) The proportion of the Canadian tax otherwise payable that the foreign non-business income is of the total income for the year.
The amount in this case would be $2,900 ($2,900 X $10,000/$10,000).
The focus of this interpretation is on what amount represents the foreign taxes paid under (a) above. Is the foreign taxes paid considered to be $10,000? Or does the $10,000 need to be pro-rated to reflect the amount that is associated with the gain that is taxable in Canada? If the $10,000 of U.S. taxes is pro-rated, the portion of the U.S. taxes paid which is associated with the gain that is taxed in Canada is $2,000 ($10,000 X $20,000/$100,000). If the pro-rated amount of foreign taxes paid is used, the foreign tax credit available would only be $2,000.
In the October 24, 2012 Notice of Ways and Means Motion, the proposed legislation changed the non-resident trust rules as follows:
7. (1) Section 94 of the Act is replaced by the following:
94(3) If at a specified time in a trust's particular taxation year (other than a trust that is, at that time, an exempt foreign trust) the trust is non-resident (determined without reference to this subsection) and, at that time, there is a resident contributor to the trust or a resident beneficiary under the trust,
(a) The trust is deemed to be resident in Canada throughout the particular taxation year for the purposes of
(i) Section 2,
(viii) Determining the liability of the trust for tax under Part I, and under Part XIII on amounts paid or credited (in this paragraph having the meaning assigned by Part XIII) to the trust,
(b) No deduction shall be made under subsection 20(11) by the trust in computing its income for the particular taxation year, and for the purposes of applying subsection 20(12) and section 126 to the trust for the particular taxation year
(i) In determining the non-business income tax (in this paragraph as defined by subsection 126(7)) paid by the trust for the particular taxation year, paragraph (b) of the definition "non-business income tax" does not apply, and
(ii) If, at that specified time, the trust is resident in a country other than Canada,
(A) The trust's income for the particular taxation year is deemed to be from sources in that country and not to be from any other source, and
(B) The business-income tax (in this paragraph as defined by subsection 126(7)), and the non-business-income tax, paid by the trust for the particular taxation year are deemed to have been paid by the trust to the government of that country and not to any other government;
Under proposed subparagraph 94(3)(b)(ii), there is no limiting wording that is similar to the current wording in clause 94(1)(c)(ii)(B) of the Act which requires that the foreign tax paid "can reasonably be regarded as having been paid in respect of that income" in order to qualify for the foreign tax credit. The October 2012 explanatory notes to the proposed legislation issued by the Department of Finance noted:
In particular, paragraph 94(3)(b) provides in respect of the trust for the particular taxation year that:
- No deduction under subsection 20(11) of the Act is permitted; however, a deduction continues to be available to the trust under subsection 20(12) of the Act in respect of non-business income tax paid by the trust in respect of an item of income included in computing the trust's income for the year;
- For the purposes of subsection 20(12) and section 126 of the Act, the non-business income tax of the trust for the particular taxation year is determined without reference to paragraph (b) of the definition "non-business-income tax", with the result that its resulting non-business income tax is fully creditable against the trust's Canadian tax otherwise payable for the particular taxation year, or alternatively, fully deductible under subsection 20(12) in computing the trust's income from a source on which the tax was paid; and
- For the purposes of subsection 20(12) and section 126 of the Act, the trust's income, and foreign taxes paid by it, for the particular taxation year are "pooled" to the country, if any, other than Canada in which the trust is resident for the particular taxation year. The effect of this rule will also extend to subsections 94(16) and 104(22) to (22.3), which allow the trust to designate a portion of its foreign tax credit in favour of its electing contributors and beneficiaries, respectively.
Although proposed paragraph 94(3)(b) makes reference to subsection 20(12) of the Act as well, the deduction of foreign non-business income tax provided under subsection 20(12) of the Act is not available in the context of a capital gain, since the subsection 20(12) deduction is only available in computing income from business or property, and the foreign taxes have to be paid in respect of such income. In this case, the foreign taxes paid by the trust are in respect of a capital gain, and not any income from business or property as determined under Canadian law or foreign law.
Based on the above, there is no restriction in proposed subsection 94(3) in the determination of what amount of the foreign taxes paid is creditable. Rather, the full amount of the foreign taxes paid should be creditable, and will not need to be pro-rated to reflect the amount of U.S. taxes that is related to the amount of the gain that is taxable in Canada. While Canada and the U.S. may have different rules for calculating the income from a particular source, the amount of foreign non-business income tax paid is not limited if the amount of income computed for Canadian tax purposes from that same source happens to be less. Accordingly, in your example the full $10,000 of U.S. taxes should be the amount determined in paragraph 126(1)(a), and the foreign tax credit allowable pursuant to subsection 126(1) would be $2,900.
We note however that if subsection 75(2) applies to attribute the gain of the trust to the beneficiary, no foreign tax credit would be available to the beneficiary in respect of taxes paid by the trust.
We trust these comments are of assistance.
Olli Laurikainen, CPA, CA
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2013
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2013