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 purpose of the foreign tax credit, can the foreign withholding tax considered to be paid by a member of a partnership be something other than a pro-rata amount of the total foreign withholding tax paid by the partnership?
Position: Yes, in certain circumstances. When the amount of foreign withholding tax paid by (i.e., withheld from the payment to) the partnership was computed by reference to each partner’s treaty status with the jurisdiction from which the partnership earned the foreign source income; and the evidence provided demonstrates that the sum of the amounts of foreign withholding tax considered to be paid by each partner does not exceed the amount of foreign tax actually paid by the partnership.
Reasons: The Act permits a foreign tax credit in certain circumstances for an amount of foreign tax paid by a taxpayer. In certain limited situations, the amount paid need not necessarily represent a pro-rata amount.
September 8, 2017
Re: Foreign non-business income tax considered paid by member of a partnership
This technical interpretation is in reply to your email of November 27, 2014, regarding the calculation of a foreign tax credit by a member of a partnership. We apologize for the delay in responding to you.
In your email, you suggested that in a scenario where foreign source dividends are received by a partnership with Canadian resident partners and withholding tax is levied by the foreign jurisdiction based on particular partners’ treaty status, the amount of foreign withholding tax considered to be paid by a particular partner should be the portion of foreign withholding tax suffered by the partnership based on that partner’s treaty status. You further noted, however, that information contained in Income Tax Folio S5-F2-C1, Foreign Tax Credit (the “Folio”), suggests that a single blended rate applies to each partner. You requested our comments in this regard.
This technical interpretation provides general comments about the provisions of the Income Tax Act (“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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.
The following hypothetical scenario is assumed for the purpose of this technical interpretation:
- Mr. A is a resident of Country X and a non-resident of Canada for purposes of the Act.
- Mr. B is a resident of Canada for purposes of the Act. Mr. A and Mr. B are partners in AB Partnership, with each partner holding a 50% interest therein.
- AB Partnership was formed under the laws of, and carries on its business activities in, Canada. Mr. A’s and Mr. B’s share of the income from AB Partnership, and AB Partnership’s classification as a partnership, are the same in both Canada and Country X. There are no hybrid instruments or entities in the assumed scenario, and as such, the foreign tax credit generator rules contained in subsections 126(4.11) to (4.13) of the Act do not apply.
- Xco is a corporation resident in Country X. AB Partnership owns 20% of the shares of Xco.
- Country X determines the treaty benefits applicable to a partnership with partners not resident in Country X by reference to each partner’s treaty status with Country X. Pursuant to the tax treaty between Canada and Country X, the rate of withholding taxes on dividends paid by a corporation resident in Country X to a non-resident owner of 10% or more of the shares of the corporation is 5%.
- AB Partnership receives a $1000 dividend from Xco. Pursuant to Country X’s withholding tax regime, Xco is required to, and does, withhold a total tax of $25 from the $1000 dividend payment to AB Partnership (that is, 5% of the portion (50%) of the dividend beneficially owned by Mr. B).
It is our understanding that, in regards to this hypothetical scenario, your assertion is that Mr. B should be entitled to include $25 as non-business income tax paid in respect of Country X in the calculation of his foreign tax credit, rather than a pro-rata amount of $12.50 (equal to a 50% share of the $25 withholding tax levied).
Pursuant to paragraph 96(1)(f) of the Act, as a member of AB Partnership, Mr. B would include in his income from a source in Country X, his share of AB Partnership’s dividend income from Xco. Also, for the purpose of section 126 of the Act, Mr. B’s non-business income tax in respect of Country X would be considered to include his share thereof paid by AB Partnership. As stated in paragraph 1.39 of the Folio, a partner’s share of the tax paid by a partnership is generally the same proportion of the total foreign taxes paid by a partnership as the taxpayer’s share of income is to the total income of the partnership. This is, in our view, consistent with the following comment from Justice Webb in 4145356 Canada Limited v. The Queen 2011 TCC 220: “Since the income of the Appellant is its share of the income of Crown Point (from the same sources of income), the amount of foreign taxes paid by the Appellant should be its share of the foreign taxes paid by Crown Point in relation to that same income.”
The use of the word “generally” in paragraph 1.39 of the Folio allows that there may be circumstances where a partner’s share of the total tax paid by a partnership is something other than a pro-rata amount. In the hypothetical scenario described above, to the extent that Mr. B would be able to provide sufficient, clear, and unambiguous evidence with his tax return that the $25 of foreign tax paid by (i.e., withheld from the payment to) AB Partnership was computed by reference to his treaty status with Country X and that Mr. A was not claiming any amount of the $25 as a foreign tax credit against any Canadian income tax otherwise payable, in our view, it would be reasonable to conclude that Mr. B’s share of the foreign tax paid by AB Partnership was $25. As such, he could include $25 as non-business income tax paid in respect of Country X in the calculation of his foreign tax credit.
Paragraph 1.45 of the Folio discusses the evidence of payment of foreign tax that is to accompany each return in which a foreign tax credit is claimed. In addition to the evidence described in the Folio, where a member of a partnership such as Mr. B seeks to have something other than a pro-rata amount of the total foreign withholding tax paid by the partnership considered to be a non-business income tax paid by them, the following additional information should, in our view, be provided to support their claim:
- the name of each partner of the partnership;
- the Canadian tax identification number, if any, of each partner;
- the country of residence of each partner;
- the nature and amount of each partner’s interest in the partnership;
- the calculation and amount of income allocated to each partner; and
- the calculation and amount of foreign withholding tax considered to be paid by each partner.
The evidence provided should also demonstrate that: i) the amount of foreign withholding tax paid by (i.e., withheld from the payment to) the partnership was computed by reference to each partner’s treaty status with the jurisdiction from which the partnership earned the foreign source income; and ii) the sum of the amounts of foreign tax considered to be paid by each partner does not exceed the amount of foreign tax actually paid by the partnership as evidenced by other supporting documentation.
We trust our comments are of assistance.
Lori Michele Carruthers, CPA, CA
for Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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