10 February 1993 Income Tax Severed Letter 9300776 - Non-business-income Tax

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

February 10,
1993

Appeals and Referrals Division Rulings
Directorate
Pat Murphy, Section Chief T.B. Kuss
(613) 957-2117

Attention: Peter Bush

930077

Subsection 20(12) Deduction and Foreign Tax Credits This is in reply to your memo dated January 8, 1993 regarding the above matter. Our comments will be general in nature as they have application to each of the specific situations described in your referral.

In our view, under current law, a subsection 20(12) deduction does not have to be sourced against a particular type of income (i.e. employment, business or property income). Consequently, in situations where a non-business- income tax is paid on amounts which are not, or may never be, subject to Canadian tax, income which should properly be taxed in Canada is inappropriately sheltered. The proposed amendment to subsection 20(12) is an attempt by the Department of Finance to correct this problem.

It is also our opinion that the wording of paragraph 3(d) is broad enough to allow for a loss from a property or business to be created by a subsection 20(12) deduction, provided the taxpayer had a property or business that could conceivably generate income for the year (notwithstanding that there may not have been any revenue for that particular year or that the non-business-income tax was not directly related to that property or business source). Therefore, in these circumstances, it would be possible to have a non-capital loss pursuant to paragraph 111(8)(b) effectively created by a subsection 20(12) deduction. Non-business-income tax paid to a country for a taxation year would be creditable against Canadian taxes, provided the taxpayer had "subsection 126(1) type income" from that country (notwithstanding that the there may not have been any foreign source income for Canadian tax purposes to which the non-business-income tax directly related). It is our view that foreign taxes paid in respect of a capital gain reserve that was included in income in the foreign jurisdiction would normally qualify as a non-business-income tax for purposes of paragraph 126(7)(c).

While we have not reviewed the foreign tax credit computations for the years in question, we should point out that where the taxpayers are U.S. citizens the computations should be made in accordance with the rules in paragraphs 4, 5 and 6 of Article XXIV of the Canada-U.S. Income Tax Convention.

We hope our comments are of assistance.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch