25 May 1988 Income Tax Severed Letter 5-5555 - [Subsection 126(1) of the Income Tax Act]

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.

R.C. O'Byrne (613) 957-2126

May 25, 1988

Dear Sirs:

Re: Article XXIV - Canada-U.S. Income Tax Convention (1980) (the "Convention") Subsection 126(1) of the Income Tax Act (the "Act")

This is in reply to your letter of February 9, 1988 in which you outlined a situation where

1) a client of yours is required to report United States source non-business income and pay tax thereon in Canada during 1988, and

2) this United States non-business income will not be reported and the tax paid thereon in the United States until 1991.

You then asked whether the United States tax payable on this income in 1991 could be calculated and used to claim a foreign tax credit under subsection 126(1) of the Act in your client's 1988 Income Tax Return. Specifically, you have asked whether Article XXIV of the Convention would permit this course of action.

Our Comments

Article XXIV of the Convention

As we understand it you are concerned about whether paragraph 2(a) of this Article, which permits a Canadian resident to claim a foreign tax credit pursuant to Canadian tax law for "income tax paid or accrued to the United States on profits, income or gains arising in the United States", would permit the United States tax which will be paid in 1991 to be accrued and allocated to your client's 1988 taxation year for purposes of claiming a foreign tax credit. In our opinion the United States tax which will be paid in 1991 cannot be accrued until such time as it becomes payable. For this reason it is our view that this Article would have no application in this situation.

Subsection 126(1) of the Act

As you are aware paragraph 126(1)(a) of the Act permits a taxpayer to claim non-business income tax "paid by him for the year" to the foreign government as a foreign tax credit. In our opinion this phrase means that only non-business income tax paid for the current year can be claimed as a foreign tax credit in the current year. Thus it is our view that in your situation the United States tax paid in 1991 is not paid for 1988 and cannot be used to claim a foreign tax credit in that year.

We trust this will be of assistance to you.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch