20 May 1993 External T.I. 9303615 F - Reasonably Regarded as Attributable

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

May 25, 1993

Dear Sir:

This is further to your letter of February 1, 1993 concerning the meaning of the terms "reasonably be regarded as attributable to" referred to in subparagraph 126(7)(c)(vi) of the Income Tax Act (the "Act") in the following factual situation.

Facts

1      An individual working in a foreign country (say, 365 days) is a resident of Canada for tax purposes.

2.     Foreign taxes are paid to the foreign country (say, $48,000 Cdn.) in respect of salary and wages (say, $120,000 Cdn.) attributable to services rendered in the foreign country.

3.     The individual's employment in the foreign country meets the conditions as set out in subsection 122.3(1) and is consequently eligible to claim an Overseas Employment Tax Credit of $18,667 (see Schedule 1 attached to your letter of February 1, 1993).

General Comments

Paragraph 126(7)(c) provides that:

"Non-business-income tax", paid by a taxpayer for a taxation year to the government of a country other than Canada means.... but does not include a tax, or the portion of a tax

(iv)     that, where the taxpayer deducted an amount under subsection 122.3(1) from his tax otherwise payable under this Part for the year, may reasonably be regarded as attributable to his income from employment to the extent of the lesser of the amounts determined in respect thereof under paragraphs 122.3(1)(c) and (d) for the year. (emphasis added)

Where a taxpayer was resident in Canada at any time in the taxation year and is otherwise liable to pay tax under Part I, subsection 126(1) allows him to claim a credit, "against tax otherwise payable", on a portion of any "non-business-income tax" paid by him for the year to a foreign country. The term "non-business income tax" is defined in paragraph 126(7)(c) and it excludes any portion of the foreign tax that may be reasonably regarded as attributable to employment income eligible for the overseas employment tax credit where the taxpayer claimed such credit under subsection 122.3(1). The creditable portion of non-business-income tax is also limited in accordance with the formula in subsection 126(1)(b)(E)(II) since the amount of foreign sourced income is reduced on the calculation of the foreign tax credit.

The deductions provided for in subsections 122.3(1) and 126(1) are permissive deductions (i.e. "a taxpayer may deduct"). Should a qualifying individual choose not to make a deduction under subsection 122.3(1), the deduction otherwise available pursuant to subsection 126(1) is not affected. Where no amount has been deducted pursuant to subsection 122.3(1), neither subclause 126(1)(b)(i)(E)(II) nor subparagraph 126(7)(c)(vi) will be affected.

Subparagraph 126(7)(c)(vi) therefore excludes certain foreign taxes (i.e. taxes that relate to amounts already deducted pursuant to 122.3(1) of the Act) from the definition of "non-business income tax" paid by the taxpayer in a taxation year.

With respect to the Schedule two attached to your letter, it is our opinion that the first alternative would be considered the most appropriate since, in our opinion, this method properly excludes the portion of the tax which may reasonably be regarded attributed to the income from employment that relates to the amount deducted under subsection 122.3 of the Act.

The second alternative, in our view would not be acceptable since the taxpayer has already been given a deduction under subsection 122.3(1) with respect to the full amount of the Canadian taxes levied on the $80,000. Accordingly, the tax that should be eligible for a claim for foreign tax credit purposes would be the foreign tax that relates to the $40,000 on which the taxpayer could not claim full tax relief under 122.3. In this case the amount that would be appropriate for claiming a foreign tax credit would be $16,000. (40/120 x 48,000) as determined under the first alternative.

We trust that this is adequate for your purposes.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch