15 October 1990 Internal T.I. 902469 F - Foreign Tax Credit and Canada-U.S. Income Tax Convention

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.

October 15, 1990

Dear Sirs:

This is in answer to your letter of September 6, 1990 concerning section 126 of the Income Tax Act (the Act) with respect to a Canadian resident individual who owns shares of a U.S. corporation which corporation elects to be taxed as a subchapter S corporation. 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 level in a manner similar to the way in which the income or loss of a partnership is taxed in a partner's hands. We assume that the U.S. taxes paid by a Canadian resident in these circumstances are not refundable.

You are concerned with a situation where the subchapter S election is made and as a result the Canadian resident individual pays more U.S. tax on each of his various sources of income than he would have paid had he not consented to the election. In this respect you query whether Revenue Canada will regard any of that extra tax as being creditable for purposes of subsection 126(1) of the Act or deductible for purposes of subsection 20(12) of the Act.

The U.S. sourced income received by the Canadian resident individual from the S corporation would be treated as a dividend for purposes of the computation of income subject to Canadian tax. As such any U.S. personal income taxes paid with respect thereto 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 which credit is limited to the amount of tax that would be exigible if the income were earned in Canada. The U.S. source income for purposes of computing a foreign tax credit under subsection 126(1) is reduced by the amount deducted under subsection 20(11). Any excess of U.S. personal income tax paid, after deducting the amount deductible under subsection 20(11) and the amount of the tax credit under subsection 126(1), may be deducted in the computation of income pursuant to subsection 20(12) of the Act.

In our view, therefore, any excess U.S. tax paid by the Canadian resident individual as a result of the subchapter S election by the corporation would be creditable for purposes of subsection 126(1) or deductible for purposes of subsection 20(12) as outlined above. However, in most situations, any excess U.S. taxes would be deducted under subsection 20(11) of the Act.

We hope that our comments will be of assistance to you.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch