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: 1. Are foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS limited to 15% for foreign tax credit purposes? 2. If yes, is the excess foreign tax deductible from income by the individual?
Position: 1. Effectively, yes; 2. No.
Reasons: 1. Operation of the law due to the language “(except such portion of that tax as was deductible under subsection 20(11) of the Act in computing its income for the year)” in 144(8.1)(b) of the Act. 2. No provision of the Act deems any portion (or all) of the foreign NBIT paid by the EPSP and allocated to an employee beneficiary to have been paid by the employee for the purposes of subsection 20(11) or 20(12) of the Act.
January 31, 2018
Re: Foreign tax credit and employees profit sharing plan
We are writing in reply to your email of November 15, 2016, in which you asked whether foreign taxes allocated from an employees profit sharing plan to an individual on a T4PS is limited to 15% for purposes of the foreign tax credit and if so, whether any excess is deductible from the individual’s income.
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, however, we offer the following general comments, which may be of assistance to you.
In general terms, a foreign tax credit is a deduction from a taxpayer’s Canadian tax otherwise payable that may be claimed in respect of foreign income or profits tax paid by the taxpayer on income received from outside Canada and reported on the taxpayer’s Canadian income tax return. Therefore, in order for an employee beneficiary of an employees profit sharing plan (“EPSP”) to claim a foreign tax credit, it must be established that the employee has paid foreign tax in respect of foreign source income reported on their tax return.
Establishing foreign source income and foreign tax paid
An EPSP is an arrangement that allows an employer to share profits with all, or a designated group of, employees. Under an EPSP, amounts are paid to a trustee to be held and invested for the benefit of the employees who are beneficiaries of the plan. Pursuant to the definition of EPSP in subsection 144(1) of the Act, the trustee is required to allocate to its employee beneficiaries, among other things, all profits from trust property and all capital gains and losses. This would include foreign non-business income of the EPSP. As noted in paragraph 8 of IT-379R, Employees Profit Sharing Plan – Allocations to Beneficiaries, the trustee of an EPSP may allocate foreign non-business income amongst employee beneficiaries on a reasonable basis having regard to all of the circumstances including the terms and conditions of the plan.
Pursuant to subsection 144(3) of the Act, allocations (with certain exceptions) made to an employee beneficiary of an EPSP are included in computing the income of the employee. For purposes of the foreign tax credit rules in subsection 126(1) of the Act, paragraph 144(8.1)(a) of the Act results in the foreign non-business income of an EPSP from a particular foreign country that is allocated to an employee beneficiary, and is so designated by the EPSP, being deemed to be income of the particular employee from sources in that foreign country. This establishes that the employee has foreign non-business income to report on their tax return for purposes of the foreign tax credit rules.
Where an amount of foreign non-business income tax (“NBIT”) is paid by the EPSP to a particular foreign country, for purposes of the foreign tax credit rules in subsection 126(1) of the Act, paragraph 144(8.1)(b) of the Act results in the portion (other than the portion that is deductible by the EPSP under subsection 20(11) of the Act) that is paid on the foreign non-business income that is deemed by paragraph 144(8.1)(a) of the Act to be the income of a particular employee being deemed to have been paid by that employee on that foreign non-business income. This establishes that the employee has paid foreign NBIT in respect of foreign non-business income reported on their tax return for purposes of the foreign tax credit rules.
Limit of 15%
Due to the expression “except such portion that is deductible by the EPSP under subsection 20(11) of the Act (footnote 1) ,” as it appears in paragraph 144(8.1)(b) of the Act, if an EPSP has paid foreign NBIT in excess of 15% of the related foreign-source income from property (other than real or immovable property), the excess is excluded from the amount of foreign NBIT deemed, for purposes of the foreign tax credit rules, to have been paid by an employee beneficiary (footnote 2) . Therefore, an employee beneficiary of an EPSP is, effectively, restricted to a foreign tax credit of no more than 15% of the foreign non-business income (other than income from real or immovable property) allocated to them by the EPSP.
Deduction for any excess?
Subsections 20(11) and 20(12) of the Act, when applicable, provide relief to individuals through a deduction in the computation of their income for foreign income or profits tax paid by the individual.
However, unlike paragraph 144(8.1)(b) of the Act which deems an employee beneficiary of an EPSP to have paid foreign NBIT for purposes of the foreign tax credit rules, there is no provision of the Act which deems any portion of the foreign NBIT paid by an EPSP to have been paid by an employee beneficiary for the purposes of subsection 20(11) or 20(12) of the Act. Consequently, an employee beneficiary would not be entitled to a deduction under either subsection 20(11) or 20(12) of the Act in respect of any excess foreign NBIT allocated from the EPSP.
Where an employee beneficiary of an EPSP is claiming a foreign tax credit, subsection 126(6) of the Act requires that a separate credit is to be claimed for each of the countries to which foreign NBIT is paid or deemed paid by the employee. As noted in the General Income Tax and Benefit Guide 2017 under the heading “Line 405 – Federal foreign tax credit,” form T2209, Federal Foreign Tax Credits, is to be completed to calculate the amount of foreign tax credit that may be claimed by an individual for a tax year. As noted on form T2209, it is CRA’s current position that if the total foreign NBIT paid (and in the case of an employee beneficiary of an EPSP, deemed paid) to all foreign countries is not more than $200, an individual need not do a separate calculation for each country in order to claim a foreign tax credit.
Lori Michele Carruthers, CPA, CA
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Subsection 20(11) of the Act provides that an individual [which includes a trust and therefore an EPSP] may deduct the portion, if any, of the foreign tax paid by them that exceeds 15% of the gross income included in income for the year from the particular property.
2 We would note that the subsection 20(11) exception applies to an amount that is deductible whether or not it was deducted. We would also note that although the application of subsection 144(2) of the Act results in no tax being payable on the taxable income of an EPSP, in our view, an EPSP computes its income for purposes of the Act and when doing so is eligible for a deduction under subsection 20(11) of the Act.
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