Principal Issues: In the situation provided, 1) Whether a resident contributor to a U.S grantor trust can claim the foreign tax credit in respect of the foreign taxes paid by the contributor where the income of the trust is designated pursuant to subsection 104(22). 2) Whether the contributor can claim the foreign tax credit where the contributor elects to have subsection 94(16) apply and the trust designates the income under paragraph 94(16)(c). 3) Whether the contributor can deduct an amount under subsection 20(11) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply. 4) Whether the contributor can deduct an amount under subsection 20(12) in respect of the foreign taxes paid, where the trust designates the income under subsection 104(22), or the contributor elects to have subsection 94(16) apply.
Position: 1) Yes; a designation under subsection 104(22) is not necessary to obtain this result. 2) Yes. 3) A deduction is available under subsection 20(11) where the trust distributes its income to Mr. X in the year. No deduction under subsection 20(11) is available where Mr. X elects to have subsection 94(16) apply. 4) A deduction under subsection 20(12) is available in both situations.
Reasons: 1) Paragraph 94(3)(a) does not refer to subsection 108(5); accordingly the amount paid or made payable by the U.S. trust is foreign source income to the beneficiary for purposes of section 126, without the subsection 104(22) designation. 2) Paragraph 94(16)(c) provides that the amount designated is foreign source income to the electing contributor for purposes of section 126. 3) Where income is distributed to Mr. X, see reasons in 1). Where the contributor elects to have subsection 94(16) apply, paragraph 94(16)(b) deems the amount determined in paragraph (a) to be from a source in Canada. The designation under paragraph 94(16)(c) applies for purposes of paragraphs 94(16)(c), (d) and section 126 only and does not extend to subsections 20(11) and (12). This option does not satisfy the condition in subsection 20(11) that the income is from a source outside Canada. 4) As the Canadian resident individual includes a distribution from the trust in their income under subsection 104(13), and subsection 108(5) deems the income to be income from a property that is an interest in the trust, the "in respect of" condition in subsection 20(12) is satisfied. The same result occurs where the individual includes an amount in income pursuant to subsection 94(16).