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.
Prenez note que ce document, bien qu'exact au moment émis,
peut ne pas représenter la position actuelle du ministère.
Whether a U.S. citizen who is resident of Canada pursuant to
Article IV of the Convention can benefit from foreign tax
credit under section 126 with respect to U.S. AMT?
The taxpayer has no source of income from the U.S. AMT is
not a business-income tax, nor a non-business-income tax.
XXXXXXXXXX Robert Gagnon
December 16, 1996
Re: U.S. Alternative Minimum Tax
This is in reply to your letter of September 17, 1996 wherein you requested our opinion concerning the application of the foreign tax deduction under the Income Tax Act ("Act") and the Canada-U.S. Income Tax Convention ("Convention") in the following situation.
An individual was citizen of the United-States and resident of Canada during the 1994 and 1995 taxation years. He earned only Canadian source income and was considered resident of Canada pursuant to Article IV of the Convention for these taxation years. The Internal Revenue Service has reassessed the taxpayer for 1994 pursuant to the Internal Revenue Code and taxes were payable because of the U.S. alternative minimum tax ("U.S. AMT"). You mentioned that the taxpayer was also subject to the AMT for 1995.
The situation outlined in your letter appears to relate to transactions that have taken place. If you wish the Department's view with respect to completed transactions, you should write to your client's Tax Services Office.
While we are unable to comment on the income tax consequences attendant on the specific facts described in your letter, we provide the following general comments which we hope will be of assistance to you.
A taxpayer who was in 1994 and 1995 citizen of the United-States, resident of Canada pursuant to Article IV of the Convention, and who had only Canadian source income, cannot benefit from a foreign tax credit under section 126 of the Act with respect to the U.S. AMT. The U.S. AMT is not a business-income tax as defined under subsection 126(7) of the Act because there is no business carried on by the taxpayer outside Canada. Pursuant to paragraph (d) of the definition of non-business-income tax in subsection 126(7)
of the Act, U.S. AMT on Canadian source income is not a non-business-income tax. Under the Convention, Canada has the right to tax this income and the U.S., not Canada, should be granting credit in respect of the Canadian tax.
Paragraph 2 of Article XXIX of the Convention states that, except as provided in paragraph 3, nothing in the Convention shall be construed as preventing Canada from taxing its residents and, in the case of the U.S., its citizens, as if the Convention did not exist.
Paragraph 3 of Article XXIX provides that paragraph 2 shall not affect the obligations undertaken by a Contracting State under, inter alia, Article XXIV (Elimination of Double Taxation). Paragraph 3 of Article XXIV, states that, for purposes of that Article, income of a resident of Canada which may not be taxed in the U.S. in accordance with the Convention (without regard to paragraph 2 of Article XXIX) shall be deemed to arise in Canada. If the Convention is read without regard to paragraph 2 of Article XXIX, Canadian source income received by a resident of Canada would not be subject to tax in the U.S. under the Convention and such income would therefore be deemed to arise in Canada for purposes of Article XXIV.
Paragraphs 1 and 2 of Article XXIV are subject to paragraphs 4, 5 and 6 of that Article. Paragraphs 4, 5 and 6 provide special rules for U.S. citizens who are resident in Canada.
Under subparagraph 4(a), Canada would not have to allow a credit in respect of U.S. tax paid on the above income as such income does not arise in the U.S. for purposes of that Article. Under subparagraph 4(b), the U.S. shall allow as a credit against U.S. tax the income tax paid or accrued to Canada after the deduction (in this case nil) computed under subparagraph 4(a). Paragraphs 5 and 6 do not apply to this situation as they only deal with income that otherwise arises in the U.S. under Article XXIV.
As paragraph 1 of Article XXIV is subject to paragraphs 4, 5 and 6, and these paragraphs are not subject to U.S. domestic tax law, the credit to be allowed by the U.S. under the Convention should not be affected by the 90% limitation in the U.S. AMT rules.
It is our understanding, however, that the U.S. has, through the enactment of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA"), legislated in their domestic tax law a specific treaty override with respect to the foreign tax credit under the AMT rules. It is our understanding that the U.S. tax authorities consider the treaty override in TAMRA to take precedence over treaties that were in effect at that time. Revenue Canada does not share that view.
If a taxpayer want to pursue this matter, his representations should be addressed to the Internal Revenue Service.
The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, is not binding on the Department.
We trust our comments will be of assistance to you.
Reorganizations and International Division
Income Tax Rulings and
Policy and Legislation Branch
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