19 April 1990 Ruling 58761 F - Foreign Tax Credit Subchapter "S"

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.

April 19, 1990

Dear Sirs:

This is in reply to your letter of September 27, 1989 concerning subsection 126(1) of the Income Tax Act (the "Act") as it relates to "S" corporations in the United States.

Under subchapter "S" of the Internal Revenue Code ("IRC") a corporation which has 35 shareholders or less may elect to be treated as an "S" corporation if all shareholders of the corporation consent to such election.  Where such an election is made, the U.S. corporation is not liable to tax and the income or loss of the "S" corporation is taxed at the shareholder's level in a manner similar to the way in which the income or loss of a partnership is taxed in the partner's hands.

You are concerned with a situation where a U.S. citizen is a resident of Canada for tax purposes and owns shares of a U.S. corporation which has elected to be treated as a subchapter "S" corporation under the IRC. During 1989 the Canadian resident received drawings from the U.S. corporation totalling 24(1) The amount of the drawings from the if U.S. corporation was equal to the taxpayer's share of the income of the corporation which has a corporation fiscal year end for U.S. tax purposes of January 31, 1990.  You are concerned that the 24(1) may be required to be reported by the Canadian resident in 1989 whereas the tax paid by the "S" corporation on his behalf was not paid until the end of its 1990 fiscal year.  This would create a problem of matching foreign income with foreign taxes paid by an individual resident in Canada if such individual had no U.S. source income for Canadian tax purposes in 1990.

If the amount received by the taxpayer in 1989 is in fact a dividend, (as opposed to an advance with respect to a dividend to be declared in 1990), then such dividend is required to be included in his 1989 income for Canadian tax purposes.

If the taxes paid to the U.S. are for the 1990 U.S. taxation year then they would not qualify as a non-business-income tax paid for the purposes of a deduction from income under either subsection 20(11) or 20(12) of the Act or for the purposes of a foreign tax credit under subsection 126(1) of the Act for taxpayer's 1989 taxation year in Canada.  This would be the result even if the 1990 U.S. personal income tax was paid as an instalment at the same time as he pays his 1989 Canadian income taxes.

The amount of U.S. personal income taxes paid for the 1990 taxation year can not be carried back to the 1989 taxation year for Canadian tax purposes, as either a tax credit or deduction from income.

Should the taxpayer have no U.S. source income for Canadian tax purposes in 1990 the amount of U.S. personal income taxes paid will be treated as non-business-income tax and may be deducted in computation of income in the taxpayer's 1990 taxation year in Canada, pursuant to subsection 20(12) of the Act.

If the amounts received by the taxpayer in 1989 were in fact advances in respect of a dividend to be declared and paid in 1990 by the "S" Corporation, then the amount of such a dividend would be included in the computation of income for Canadian tax purposes in the taxpayer's 1990 taxation year.  In this case the U.S. personal income taxes paid less any amount deductible under subsection 20(11) of the Act would be eligible for the purposes of computing a foreign tax credit under subsection 126(1) of the Act.  Since U.S. taxes paid are reduced for purposes of the foreign tax credit calculation by the amount deductible pursuant to subsection 20(11) of the Act regardless of whether or not the deduction under subsection 20(11) of the Act is claimed, it is always to the taxpayer's advantage to take the deduction.  The amount deducted under subsection 20(11) of the Act also reduces the U.S. source income for the purposes of computing a foreign tax credit under subsection 126(1) of the Act.  Any excess of U.S. personal income tax paid, after deducting the amount deductible under subsection 20(11) of the Act and the amount of the tax credit under subsection 126(1) of the Act, may be deducted in the computation of income pursuant to subsection 20(12) of the Act.

We trust this is adequate for your purposes.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch