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: Is the amount of income that may be added under section 110.5 limited by the availability of a foreign tax credit at the provincial level?
Position: No.
Reasons: Section 110.5 limits the amount of income that may be added only as set out in paragraphs (a) and (b) thereof.
XXXXXXXXXX
2014-052286
Eli Kae Moore
July 24, 2014
Dear XXXXXXXXXX,
Re: Section 110.5
We are responding to your email of March 2, 2014, in which you inquired about the limits on income inclusions under section 110.5 of the Income Tax Act and whether the credit under section 126(1) of the Act may be increased to the point that no foreign tax credit is available in respect of Ontario corporate taxes.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
The limit to the amount that may be added to a corporation's taxable income for the year under section 110.5 of the Act is discussed at paragraph 1.94 of Income Tax Folio S5-F2-C1, Foreign Tax Credit, which is available on the CRA website. As set out in S5-F2-C1,
"section 110.5 allows a corporation to add any extra amount in computing its taxable income, to the extent that this causes an increase to any amount deductible by the corporation as a foreign tax credit under subsection 126(1) or (2) but does not cause any increase to an amount deductible by the corporation in a provision set out in paragraph 110.5(b). The corporation may add an amount of extra income which increases an amount deductible under subsection 126(1) or (2) as well an amount deductible under a provision listed in paragraph 110.5(b) as long as the deduction under an increased 110.5(b) provision is not claimed."
Section 110.5 does not place any limits on the income inclusion by way of referencing the availability of a credit against provincial income taxes. However, an increase in the amount of a foreign tax credit under section 126 of the Act may result in lowering the amount available as a credit for provincial tax purposes. For example, it is possible that a corporation may increase its taxable income under section 110.5 of the Act so that the full amount of the non-business-income tax paid by the taxpayer for the year to a country other than Canada is fully offset by a credit under subsection 126(1) of the Act. In this situation there would be no available foreign tax credit under section 34 of Ontario's Taxation Act.
We trust our comments will be of assistance.
Yours truly,
Lori M. Carruthers CPA, CA
International Section III
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch
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