29 August 1997 External T.I. 9701125 - 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.

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.

Principal Issues:

Whether a state tax and surtax on income received by an individual, that is calculated under a system identical to that used in most Canadian provinces, are a "non-business income tax" under 126(7)?

Position:

Yes

Reasons:

Non-business income tax includes tax paid to a political subdivision of a country.

            5-970112
XXXXXXXXXX  R. Gagnon

Attention: XXXXXXXXXX

August 29, 1997

Dear Sirs:

Re: Foreign Tax Credit

This is in reply to your letter of January 8, 1997, wherein you requested whether the payment of taxes to the government of a state in the United States gives rise to a foreign tax deduction under subsection 126(1) of the Income Tax Act ("Act") in the following situation.

An individual ("Mr. X") is resident of Canada under the Act and the Canada-U.S. Income Tax Convention. Mr. X has Canadian source income but also earns employment income in a U.S. state. Mr. X includes his U.S. employment income in calculating his U.S. federal and state tax liability. The state tax is calculated as a percentage of U.S. federal tax under a system identical to that used in most Canadian provinces. In addition, the state imposes a surtax which is calculated as a percentage of state tax owing.

We assume that the remuneration of the taxpayer is not exempt from tax in the United States under Article XV of the Canada-U.S. Income Tax Convention and that the taxpayer is not entitled to a refund of the taxes he has paid.

Comment

Where a taxpayer was resident of Canada in a taxation year and is otherwise liable to pay tax under Part I, subsection 126(1) of the Act allows him to claim a credit against his tax otherwise payable, for all or a portion of the "non-business-income-tax" paid by him for the year to the government of a foreign country without exceeding the limit provided in paragraph 126(1)(b) of the Act.

The term "non-business-income tax" paid by a taxpayer to the government of a country other than Canada is defined in subsection 126(7) of the Act; it means such portion of any income or profits tax paid by the taxpayer for the year to the government of a country other than Canada, or to the government of a state, province or other political subdivision of that country, that is not a business income tax, is not deductible under subsection 20(11) of the Act, has not been deducted under subsection 20(12), and is not excluded under paragraph (b) to (i) of the definition. Accordingly, a tax paid to the government of a state of the United-States can qualify as a non-business-income tax paid to the government of a country other than Canada.

It is usually necessary to review the relevant legislation of a state to determine whether or not a state tax qualifies as an "income or profits tax". It would appear that a state tax is an income or profits tax where it is calculated as a percentage of U.S. federal tax and the U.S. federal tax is calculated on employment income on a basis substantially similar to that of the Act. A surtax that is calculated as a percentage of a state tax that qualifies as an income or profits tax, and that is substantially similar to the individual surtax under subsection 180.1(1) of the Act, would usually be an income or profits tax.

The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R3 dated December 30, 1996, is not binding on the Department.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch