21 January 1992 Administrative Letter 9126616 F - Foreign Tax Credit - Canadian Resident and U.S. Citizen

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.

January 21, 1992

Attention:  W.M. Lynn

Foreign Tax Credit Subsections 20(11) and 20(12) of the Income Tax Act (the "Act")

19(1)

This is in reply to your memorandum of September 19, 1991 wherein you requested our opinion on your hypothetical computation of the allowable foreign tax credit with respect to pension income, other than benefits received under the U.S. social security legislation, received by a Canadian resident who is also a U.S. citizen. In particular you submitted a copy of the tax return filed by 19(1) for our review and comments.

We are in agreement with the comments set out on page 2 of your memorandum. These comments are on all fours with the example illustrated in the Technical Explanation on the Canada-U.S. Income Tax Convention (the "Convention") issued by the U.S. government and agreed to by the Department of Finance.

Pension and Social Security Income

We concur with your view that the taxpayer is not entitled to claim a subsection 20(11) of the Act deduction with respect to taxes paid to the United States on his pension income since such income is from a source that does not constitute income from property for purposes of section 3 of the Act. For the purpose of determining what credit the United States should allow for Canadian taxes paid, in accordance with paragraph 4(a) of Article XXIV of the Convention, Canada is only required to provide a foreign tax credit of 15% for U.S. taxes paid on pension income and no tax credit for U.S. taxes paid on U.S. social security payments as these are the maximum rates of U.S. tax permitted by the Convention on such income where the taxpayer was a resident of Canada and was not also a U.S. citizen. In accordance, with paragraph 4(b) of Article XXIV of the Convention the United States has to provide a tax credit equal to the amount of Canadian taxes paid (including provincial taxes) after allowing for the credits described above. Therefore, unless the U.S. taxes are greater than the Canadian tax rates on such income the only amount of U.S. taxes paid on that income after the application of the U.S. tax credit as provided by paragraph 4(b) of Article XXIV will be 15% of the pension payments. Should the U.S. taxes paid or accrued on such income exceed Canadian taxes paid, pursuant to paragraph 126(7)(c) of the Act the amount of such excess plus the 15% of the pension income will be a non- business- income tax and qualify for either a foreign tax credit under subsection 126(1) of the Act or a subsection 20(12) of the Act deduction. In general U.S. tax rates are lower than Canadian rates and where a taxpayer is claiming such excess he should establish that such excess U.S. tax was paid after the proper credits were given for Canadian taxes paid as described above. The attached example illustrates the situation described above.

U.S. Sourced Dividends, Interest and Royalties

With respect to any U.S. sourced dividends, interest and royalties included in      19(1)      income, paragraph 5 of Article XXIV of the Convention would apply. That paragraph confirms that Canada will provide a Canadian taxpayer with a foreign tax credit up to a maximum of 15% of the gross amounts received from such types of income from the United States. In addition, the taxpayer will be permitted to claim a subsection 20(11) of the Act deduction for any U.S.taxes that would have been paid in excess of 15% of the gross amounts of such dividends, interest or royalties received before the application of tax credits for Canadian taxes paid as set out in paragraph 5(c) of Article XXIV of the Convention.

Canadian Sourced Income

Subparagraph 126(7)(c)(iv) of the Act excludes from the non- business-income tax that portion of the tax that would not have been payable had the taxpayer not been a citizen of the United States and that cannot reasonably be regarded as attributable from a source outside Canada. It should be noted that the taxpayer reported      24(1)      of Canadian interest on his U.S. tax return and it is clear from the information provided that the U.S. taxes on investment income was not reduced as required by subparagraph 126(7)(c)(iv) of the Act.

Other Comments

It should be noted that paragraph 7 of Article XXIV of the Convention provides that the reference to income taxes paid or accrued to Canada or the United States include income taxes which are paid to a political subdivision or local authority (i.e. Provincial and State tax).

Based on the information provided in the copy of      19(1)     U.S. return on file, there does not appear to have been any U. S. credits, as required by paragraphs 4(b) and 5(c) of Article XXIV of the Convention, allowed for Canadian taxes paid or accrued. Therefore, it would appear that U.S. taxes paid for the purpose of Canadian foreign tax credits are not only overstated in respect of Canadian sourced income but also overstated in respect of the U.S. taxes on the pension and social security income.

In addition, it is our view that Revenue Canada should only permit the deduction of a foreign tax credit based on a proper filing of the U. S. income tax return and the application of U.S. tax credits in accordance with Article XXIV of the Convention.

In summary:

1.     Any U.S. taxes paid on Canadian sourced income will not qualify as a non-business-income tax for purposes of paragraph 126(7)(c) of the Act.

2.     On the assumption that Canadian taxes are generally higher than U.S. taxes, Canadian foreign tax credit will be limited to 15% with respect to pension income and nil with respect to U.S. social security payments by virtue of paragraph 4 of Article XXIV of the Convention.

3.     In accordance with paragraph 4(b) of Article XXIV of the Convention, the United States will allow a credit against U.S. tax any income tax paid or accrued to Canada after Canada has permitted the foreign tax credit in 2 above.

4.     Where the U.S. tax rates, after the application of paragraph 4(b) of Article XXIV, exceeds the Canadian rate of tax, Canada would be required to treat such excess as a non-business income tax for the purposes of subsections 126(1) and 20(12) of the Act with respect of items of income falling within paragraph 4 of Article XXIV of the Convention.

5.     If the U.S. tax rates exceeds 15% on interest and dividends, Canada would provide the Canadian taxpayer with a foreign tax credit, but the credit would not exceed 15% of the gross amount such income. Canada will also grant the taxpayer a subsection 20(11) of the Act deduction based on U.S. taxes determined before the credit provided for in paragraph 5(c) of Article XXIV of the Convention.

We trust this is adequate for your purposes.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch

Appendix "A"

Canadian Resident and U.S. Citizen

1.     Article XVIII(2) - W/H tax 15% on gross amount or

                   periodic pension payments ($100)

2.     U.S. tax on T/P if he is not a U.S. citizen     $15

3.     Tax in Canada on World Wide Income

Assume W.W. Income $100 (Tax 35%) Tax          35- Foreign Tax Credit (2 above)                15Canadian Tax                         $20

4.     U.S. Taxation of Citizen on W.W. Income

W.W. Income     $100     $100     $100     $100     $100Rate of Tax       ¨ 40         37         35         17         10  Tax          $  40     $  37     $  35     $  17     $  10

Minus

     Max Foreign Tax CreditArticle XXIV(4)(b)       20       20       20        2      NILTax                 20       17       15       15       10Additional non-businessincome tax                5         2     NIL     NIL     NIL