3 October 1997 External T.I. 9704345 - 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 tax paid to foreign country pursuant to that country's domestic law should be considered an "income or profits tax" where such tax is not payble under that country's tax convention with Canada

Position:

No

Reasons:

As the tax convention has relieved legal obligation to pay the tax, such is considered a voluntary tax and therefore not an income or profits tax.

Tim Kuss
XXXXXXXXXX 970434

Attention: XXXXXXXXXX

October 3, 1997

Dear Sirs:

Re: Subsection 126(7) - Business-Income Tax

This is in reply to your letter dated February 10, 1997 regarding the definition of "business-income tax" found in subsection 126(7) of the Income Tax Act.

You have asked us to address the following hypothetical situation:

-A Canadian resident individual carries on business in a foreign country.

-Pursuant to the foreign country's domestic tax law, the individual has had foreign tax withheld at source in respect of the business services the individual has performed in that country.

-Under the terms of Canada's income tax treaty with the foreign country the Canadian resident will not be liable for income tax to the foreign country in respect of the business profits as the individual does not have a permanent establishment or fixed base in the foreign country.

-The individual has not requested a refund of tax from the foreign country.

You have asked for our opinion whether the tax paid to the foreign country will qualify as a "business-income tax" under subsection 126(7).

We provide the following general comments.

It is our view that, as the tax treaty has removed the legal obligation to pay the "foreign tax", the payment of such tax (i.e. the tax paid not in accordance with the treaty) is a voluntary tax and not an "income or profits tax". Accordingly the tax would not be considered a "business-income tax" as defined under subsection 126(7).

In order to avoid "double taxation", the individual would be expected to request a refund of tax paid to the foreign country.

We hope our comments are of assistance.

Yours truly,

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