18 July 1991 Internal T.I. 911232 F - 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.

This is in reply to your memorandum to us dated May 6, 1991 whereby (on behalf of Ottawa Taxation Centre Appeals) you requested our views as to whether United States Alternative Minimum Tax ("USAMT") is an income or profits tax for purposes of section 126 of the Act and as to how such tax is to be apportioned between "business-income tax" and "non-business-income tax" as those terms are defined in paragraphs 126(7)(a) and 126(7)(c) respectively.

Our Comments:

l .     In our opinion, the USAMT imposed by section 55 of the United States Internal Revenue Code is an income or profits tax for purposes of section 126 of the Act.

2.     24(1)

     To determine the portion, if any, of the USAMT that may reasonably be regarded as tax in respect of income from a business carried on by the taxpayer in the United States so as to constitute "business-income tax", regard should be had to the portion of total income for purposes of the USAMT that is constituted by income from businesses carried on by the taxpayer in the United States.

     "Business-income tax" is defined (by paragraph 126(7)(a)) to mean such portion of any income or profits tax paid by the taxpayer for the year to the government of a foreign country as may reasonably be regarded as tax in respect of income of the taxpayer from any business carried on by him in the foreign country

     "Non-business-income tax'", on the other hand, is defined (by paragraph 126(7)(c)) by exclusion to be any income or profits tax paid by the taxpayer for a taxation year to the government of a foreign country except certain specified kinds of tax. Included in the kinds of tax excepted from non-business-income tax is any tax included in business-income tax (see subparagraph 126(7)(c)(i)).

     Having regard to the definitions of "business-income tax" and "non-business-income tax" as described above, it becomes apparent that the "apportionment" of foreign income or profits tax between the two is essentially a question of fact as to whether and to what extent the foreign tax "may reasonably be regarded as tax in respect of income of the taxpayer from any business carried on by him in the (foreign) country." If and to the extent the tax meets that description, it is a "business-income tax" and not a

     "non-business-income tax". If and to the extent the foreign income or profits tax does not meet that description it will not be a "business-income tax" but (subject to the other exceptions and exclusions in paragraph 126(7)(c)) may be a "non-business-income tax".

     The USAMT is essentially a tax on income where income is calculated differently than it is for regular U.S. income tax purposes principally by the disallowance of (or requirement to add back) certain deductions that are permitted for regular income tax purposes or by requiring recognition of income that is not recognized and included in the tax base for regular income tax purposes. The disallowance of deductions may in effect increase different types of income. For example, if a taxpayer had income from employment and a loss from a business and if the business loss was deductible for regular income tax purposes but not for USAMT purposes, employment income is, in effect, greater for USAMT purposes as it is not sheltered by the business loss. In the foregoing example, business income is obviously not created or increased by the loss being disregarded. On the other hand, if a particular "business" expense is allowed as a deduction in determining income from a business for regular income tax purposes but not for USAMT purposes, "business income" for USAMT purposes may be greater for USAMT purposes than for regular income tax purposes.

3.     Subparagraph 126(7)(c)(iv) excludes from "non-business-income tax" a tax, or the portion of a tax, that would not have been payable had the taxpayer not been a citizen of the country imposing the tax and that cannot reasonably be regarded-as attributable to income from a source outside Canada.

     24(l)

     We have not previously considered how the determination as to what portion of a foreign tax is reasonably attributable to income from a source outside Canada should be made. The requirement of the Act that the determination should be made on a reasonable basis indicates that each case must be dealt with on its own facts and that in any particular case there may be more than one acceptable method and result.

4.     We cannot determine from 19(1) 24(1) and the related material that you provided to us whether section 114 has been properly applied.  In this regard, we note that paragraph (a) of section 114 includes not only periods in the year throughout which the individual was resident in Canada but also periods throughout which the individual was employed in Canada or was carrying on business in Canada.

5.     24(1)

6.     The foreign tax credit in respect of non-business-income tax is determined under subsection 126(1) separately from the determination of the foreign tax credit in respect of business-income tax, which is determined under subsection 126(2). For purposes of determining the foreign tax credit in respect of non-business income tax paid to a particular foreign country:

(a)     the amount referred to in paragraph 126(1)(a) is the non-business income tax paid by the individual for the entire calendar year (not just the period or periods therein referred to in paragraph (a) of section 114);

(b)     where section 114 is applicable, the numerator in the fraction described in paragraph 126(l)(b) is the foreign non-business income for those periods in the calendar year referred to in paragraph (a) of section 114 and the denominator is

     the total net income of the individual from all sources (including recognition of domestic and foreign business income and losses) for those periods in the calendar year referred to in paragraph (a) of section 114

We trust the foregoing is of assistance and return herewith the orange file and all of the materials that you provided to us in connection with this matter.

DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental     Affairs Branch