27 August 1991 Internal T.I. 9112297 F - Deduction for Non-business Foreign Taxes Paid in Excess of the Foreign Tax Credit

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.

Facts

24(1)

24(1)

Issue

Should the taxpayer be permitted a deduction for non-business foreign taxes paid in excess of the foreign tax credit claimed by virtue of subsections 20(12) and 126(1) and paragraph 126(7)(c)?

Our Opinion

1.     For purposes of paragraph 126(7)(c), the term non-business income tax is defined by exception and includes any foreign income or profits tax paid to a government of a country other than Canada which is not excluded by virtue of that definition.

24(1)

2.       A subsection 20(11) deduction is not available

24(1)

3.             23        24(1)

By virtue of the operation of section 3 of the Act, the loss from property under paragraph 3(d) created by the 20(12) deduction is aggregated with income determined under paragraphs 3(a) and (b) and thus in effect shelters income from those sources.

Since the 20(12) deduction was applied against income from property, the general limitation in subsection 8(2) would not operate to disallow that deduction because the deduction was not claimed in computing income from employment.

In circumstances where a taxpayer only had income from employment (which would be the exceptional situation), it is our view that the 20(12) deduction would create a paragraph 3(d) loss from the type of property which gave rise to the foreign tax paid.  Accordingly, even in situations where the taxpayer only has employment income in Canada, the loss created by the 20(12) deduction could not be denied by virtue of subsection 8(2) as discussed above.

Since the taxpayer is not entitled to a 20(11) deduction the entire  amount of the non-business foreign tax paid of  24(1)  is eligible for a subsection 126(1) foreign tax credit pursuant to paragraph 126(7)(c) to the extent that she did not make a claim pursuant to 20(12).  In fact, the taxpayer has the following choices with respect to the capital gain and the foreign taxes paid thereon:

(a)     She may claim all the foreign taxes paid as a subsection 20(12) deduction.

(b)     She may claim a capital gains exemption if it is otherwise available to her pursuant to section 110.6.  To the extent that the non-business U.S. tax paid related to a taxable capital gain for which a section 110.6 deduction is claimed, the amount eligible as a non-business tax for the purpose of the subsection 126(1) foreign tax credit and for the 20(12) deduction would be reduced by virtue of subparagraph 126(7)(c)(vii).

(c)     She may claim a combination of a foreign tax credit and a 20(12) deduction within the limitations of the formula contained in subsection 126(1).

If you have any question regarding the foregoing please contact the author.

The  24(1) file for 19(1) is attached herewith.

ChiefForeign SectionReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch