2 September 2025 External T.I. 2022-0945251E5 - Application of subsection 126(7)

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: Whether the excise tax levied under §4999 of the IRC (tax on an excess parachute payment) meets the conditions to be considered a “non-business-income tax” under subsection 126(7) of the Income Tax Act?

Position: No.

Reasons: The tax is not levied on net income and relief under the Canada-US Tax Treaty is not available.

XXXXXXXXXX								2022-094525
									Catherine Zhang

September 2, 2025

Dear XXXXXXXXXX,

Re: Application of subsection 126(7)

This is in response to your letter dated July 8, 2022 in which you requested for our view on the application of subsection 126(7) of the Income Tax Act (the “Act”) in respect of a tax levied under §4999 (tax on an excess parachute payment) of the Internal Revenue Code (the “IRC”). Specifically, you asked whether the tax meets the conditions to be considered a “non-business-income tax” under subsection 126(7) of the Act.

Our Comments

This technical interpretation provides general comments about the provisions of the 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 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

Generally, subsection 126(1) of the Act provides that, subject to the limitations described in paragraph 126(1)(b) of the Act, a taxpayer resident in Canada may deduct from the tax otherwise payable under Part I of the Act for a year, a foreign tax credit in respect of a “non-business-income tax” paid by the taxpayer for the year to the government of a country other than Canada. Subsection 126(7) defines a “non-business-income tax” for which such deduction is available to generally include the portion of any “income or profits tax” paid by the taxpayer for the year to the government of a country other than Canada, with certain exceptions.

Our understanding of §4999 of the IRC is that it is a separate tax, adopted in 1984, that must be paid to the U.S. government on amounts defined as an “excess parachute payment” (generally speaking, compensation over a base amount paid to an employee or independent contractor on a change in control of a corporation). The provision reads as follows:

“(a) There is hereby imposed on any person who receives an excess parachute payment a tax equal to 20 percent of the amount of such payment.”

In their article, Change in Corporate Ownership or Control May Result in Golden Parachute Payments (footnote 1) , Ray A. Knight and Lee G. Knight offered some general comments that provide some context on the purpose of the introduction of this excise tax. They state in their article that:

“the golden parachute provisions (IRC sections 280G and 4999) were added by the Deficit Reduction Act of 1984 in order to discourage the use of golden parachute payments to senior executives of a company in the event of a corporate takeover (Boris I. Bittker and Lawrence Lokken, Federal Taxation of Income, Estates, and Gifts, Warren Gorham & Lamont, 1989, pp. 22–35). Congress found that agreements to make such payments hindered ‘acquisition activity in the marketplace’ by making target corporations less attractive to prospective suitors [Bittker and Lokken, quoting Staff of Joint Comm. On Taxation, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984, 98th Cong., 2d Sess. 199 (J. Comm. Print 1984)]. The prospect of a large payment tends to encourage management personnel of the target corporation to favor a proposed takeover, regardless of whether the takeover would be in the best interests of the target corporation’s shareholders. The payments promised to the executives also decrease the amounts paid to the target corporation shareholders. For these reasons, Congress made such parachute payments ‘non-deductible to the payor and subject to an excise tax of 20%, in addition to the regular income tax, in the hands of the recipient’ (Bittker and Lokken).”

As stated in paragraph 1.7 of Income Tax Folio S5-F2-C1, “Foreign Tax Credit”, (the “Folio”), in order to determine if a foreign tax is an “income or profits tax”: “the basic scheme of application of the foreign tax is compared with the scheme of application of the income and profits taxes imposed under the Act.” In order to make that determination, the scheme of taxation in the foreign country is compared to the one in Canada. The scheme of the Income Tax Act is a tax levied on net income or profits. Our understanding of the tax in §4999 of the IRC is that, it is an excise tax payable to the U.S. government on the gross amount received in addition to any income taxes owing on that amount. Thus the basis of taxation is different from the Canadian income tax.

Paragraph 1.12.1 of the Folio indicates that “a foreign tax levied on gross revenue is considered to be an income or profits tax if, after a review of the applicable legislation, it is determined that the tax on gross revenue is part of a comprehensive income tax regime and is tightly linked and subordinate to what would otherwise be accepted as an income or profits tax.” We understand that the excise tax was essentially added to discourage the use of excess parachute payments, not as a subordinate measure that is part of a comprehensive income tax regime since that income is already taxed under the regular income tax regime of the IRC. Therefore, the position in paragraph 1.12.1 of the FTC Folio does not apply in this case.

Paragraph 1.8 of the Folio also states that if a particular foreign tax is specifically identified in a tax treaty “as a tax for which Canada must grant a deduction from Canadian taxes on profits, income or gains which arose in that other country and which gave rise to the foreign tax in question, the foreign tax will qualify as an income or profits tax when applying section 126 in conjunction with that treaty article”. Article XXIV(2)(a)(i) of the Canada-US tax treaty (the “Treaty”) states, in part, that “income tax paid or accrued to the United States on profits, income or gains arising in the United States […] shall be deducted from any Canadian tax payable in respect of such profits, income or gains”.

Article II(2)(b) states that the taxes covered by the Treaty include “the Federal income taxes imposed by the Internal Revenue Code of 1986” and a few other specific U.S. taxes. Article II(3)(a) states that the Treaty applies to any taxes identical or substantially similar to those taxes to which the Treaty applies under paragraph 2 which are imposed after March 17, 1995 in addition to, or in place of, the taxes to which the Treaty applies under paragraph 2.

We understand that the excise tax on an excess parachute payment was adopted in 1984 and is part of Subtitle D of the IRC (“Miscellaneous Excise Taxes”), thus it is an excise tax that is not a “Federal income taxes imposed by the Internal Revenue Code of 1986”. Nor is it a tax that is identical or substantially similar to the taxes to which the Treaty applies under Article II(2) of the Treaty which are imposed after March 17, 1995 for the reasons mentioned above. Therefore, relief under Article XXIV(2)(a)(i) of the Treaty is not available.

On that basis, the tax levied under §4999 of the IRC is not an income or profits tax and therefore does not qualify as a “non-business-income tax” under subsection 126(7).

We trust that these comments will be of assistance to you.

Yours truly,

Yves Grondin
Section Chief
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 https://www.cpajournal.com/2020/06/17/change-in-corporate-ownership-or-control-may-result-in-golden-parachute-payments/