26 September 1997 Internal T.I. 9717736 - FTC IN RESPECT OF U.S. AMT AND MTC

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 foreign tax credit should be granted for U.S. alternative minimum tax and whether the U.S. credit for prior year minimum tax would affect the computation of Canadian foreign tax credit

Position:

Assuming that the U.S. AMT arises solely as a result of the application of the rule limiting alternative minimum tax foreign tax credit to 90% of tentative minimum tax, Canadian foreign tax credit is allowed for the portion of U.S. AMT on U.S. source income resourced to Canada only. To the extent that the U.S. credit for prior year minimum tax is attributable to Canadian source income for which no Canadian tax credit has previously been granted, such U.S. credit would not affect the amount of the U.S. federal tax otherwise payable for the purposes of computing Canadian foreign tax credit.

Reasons:see memo

Draft : September 16, 1997

Alternative Minimum Tax and Credit for Prior Year Minimum Tax of the United States and their Effect on Canadian
Foreign Tax Credit For U.S. Citizens Resident in Canada

Summary

This paper outlines our position on the granting of a Canadian foreign tax credit for U.S. Alternative Minimum Tax ("AMT")¹ and the impact of U.S. Credit for Prior Year Minimum Tax ("MTC") on the computation of U.S. tax otherwise payable of a particular taxation year for Canadian foreign tax credit purposes. The paper

-provides an overview of the rules of AMT in the U.S.;

-sets out with reasons why AMT should not affect our position with respect to the tax consequences of a U.S. citizen resident in Canada who chooses to opt out of the Canada-U.S. Income Tax Convention (the "Convention");²

-sets out with reasons why the portion of the AMT on U.S. source income resourced to Canada should be allowed as a foreign tax credit and why in certain cases it should not;

-outlines the steps to follow in determining Canadian foreign tax credits for taxpayers who are U.S. citizens resident in Canada for a particular year in which AMT arises;

-provides various examples of determining Canadian foreign tax credits for such taxpayers;

-recommends that the portion of the MTC that has not previously been utilized be included in U.S. tax otherwise payable for Canadian foreign tax credit purposes in the particular year for which MTC is claimed; and

-Outlines a method of determining that portion of the MTC.

An Overview of the U.S. Alternative Minimum Tax

Under the Reform Act of 1986, the U.S. repealed the provisions of AMT with respect to individuals and re-enacted new legislation in this regard. The purpose of the AMT rules is to ensure that taxpayers who have income but who can reduce such income by claiming certain "preference" deductions are liable to a minimum amount of income tax. One of the provisions of the new alternative minimum tax legislation is the 90% limitation on alternative minimum tax foreign tax credit ("AMTFTC") contained in Sec. 59 of the Internal Revenue Code (the "Code") which limits the foreign tax credit for AMT purposes to 90% of the tentative minimum tax ("TMT") before such credit³ ("AMTFTC 90% limitation rule"). It would, therefore, appear that the U.S. considers its foreign tax credit as a type of preferences and restricts the claim for it to 90% of the TMT. Section 1012(aa)(2)(B) of the Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") states that the amendments to the AMT provisions made by the Reform Act of 1986 to the extent that such amendments relate to the alternative minimum tax foreign tax credit shall apply notwithstanding any treaty obligation of the U.S. in effect on the date of the enactment of the Reform Act of 1986. As a result, the U.S. maintains in no uncertain terms that their AMTFTC rule under the Code applies in spite of the provisions of any U.S. treaty in effect on that date.

Generally, AMT is computed following the steps in the order set out below:

add back certain preferences and adjustments (preference items are categorized as "exclusion"⁴ and "deferred"⁵ preferences for the purpose of computing alternative minimum tax) to taxable income to arrive at alternative minimum taxable income ("AMTI") (see the attached IRS Form 6251 Alternative Minimum Tax - Individuals);

subtract an exemption amount (see line 22 of Form 6251 attached) from such AMTI. (The exemption amount for a single person is $33,750 for 1995, subject to reduction if AMTI exceeds $112,500);

apply a tax rate to the difference obtained in (b) (for 1995, the tax rates are 26% to the extent of $175,000 and 28% thereafter);

subtract AMTFTC, if any, to arrive at tentative minimum tax ("TMT"); and

subtract the amount of regular U.S. tax (i.e., the aggregate of the taxes on lines 38 and 39(a) of Form 1040 (for 1995) minus foreign tax credit on line 43 of that Form) from TMT to arrive at AMT.

From the above, you may note that AMT is the amount by which TMT (after AMTFTC) exceeds regular U.S. tax (after foreign tax credit). It is a tax in addition to regular U.S. tax that the taxpayer has to pay. If regular U.S. tax is greater than or equal to TMT, there is no AMT. AMT (other than that which arises from exclusion preferences) can be carried forward indefinitely to be claimed as a credit against U.S. regular income tax liability in a subsequent year to the extent that U.S. regular income tax liability (after all other credits are claimed) is greater than TMT in that year. Such a credit is called "Credit for Prior Year Minimum Tax" ("MTC").⁶ AMT which arises as a result of the application of the AMTFTC 90% limitation rule is eligible to be carried forward and to be claimed as MTC. For the computation of which portion of the AMT is eligible to be carried forward⁷ and claimed against U.S. regular income tax liability in subsequent years, please refer to the copy of Form 8801 Credit For Prior Year Minimum Tax - Individuals and Fiduciaries attached.

This paper deals with situations involving U.S. citizens resident in Canada where the AMT arises solely as the result of the application of the AMTFTC 90% limitation rule.

In general, this rule will not apply where U.S. source income not resourced to Canada pursuant to Article XXIV of the Convention is equal to 10% or greater of the taxpayer's total income. While the rule only applies where U.S. source income not resourced to Canada is less than 10% of the taxpayer's total income, it has been our experience that significant issues are raised with respect to the double taxation the AMT causes and how such AMT should be utilized in the computation of foreign tax credits. These issues are addressed in the paper.

In cases where the rule applies, it restricts the U.S. tax credit claim for Canadian taxes paid. This restriction applies to three categories of income. The first category is Canadian source income. The second category is U.S. source income resourced to Canada pursuant to paragraph 3 of Article XXIV of the Convention.⁸ The third category of income is the portion of U.S. source income resourced to Canada for the purposes of the Code in order that the U.S. may grant a credit for Canadian taxes paid on such income as provided for in paragraphs 4 and 5 of Article XXIV of the Convention. The types of U.S. source income involved in this category include U.S. sourced pension, interest, dividends, royalties and any U.S. source income which if received by a resident of Canada who was not a U.S. citizen would not be taxed under the Code.⁹

AMT and Double Taxation

Where AMT arises solely as a result of the application of the AMTFTC 90% limitation rule and a U.S. citizen resident in Canada has only Canadian source income, there will be double taxation to the extent of such AMT regardless of whether or not the taxpayer has claimed to opt out of the Convention. However, where the taxpayer has Canadian source income and U.S. source income resourced to Canada, the taxpayer may argue that he should be allowed to opt out of the Convention to avoid the AMT. This would be possible where the regular U.S. tax on U.S. source income (without regard to the Convention sourcing rules and hence not eligible for the U.S. foreign tax credit) was equal to or greater than the TMT (after the AMTFTC). The taxpayer would then claim a foreign tax credit in Canada for the regular U.S. tax he chose to pay on the U.S. source income. The payment of regular U.S. tax in excess of that required by the Convention by a U.S. citizen resident in Canada who is not subject to the AMT (U.S. source income not resourced to Canada equal to or greater than 10% of his total income) is a voluntary tax which is not creditable in Canada. The imposition of the AMT, which is assessed in contravention of the Convention, does not justify Canada's accepting the payment of regular U.S. tax in excess of that required by the Convention for Canadian tax purposes. Also, to the extent that the AMT related to Canadian source income, accepting this position would be tantamount to accepting a tax credit on Canadian source income and overlooking the fact that the double taxation was the responsibility of the U.S. as the result of its adopting legislation that levies taxes in contravention of the Convention.

The following example provides a summary of our position with respect to AMT and double taxation and the discussion which follows that summary provides a more in-depth analysis of the issues involved. Assume that a U.S. citizen resident in Canada earns income from employment exercised in the U.S. in addition to his Canadian source income. As a result of the sourcing rules of the Convention, such U.S. source employment income is resourced to Canada for the purposes of Article XXIV of the Convention in computing foreign tax credits. If the taxpayer follows the provisions of the Convention, there would not be any regular U.S. tax liability (assuming the income tax rates in Canada are higher that those in the U.S.) but he would incur U.S. AMT as a result of the application of the AMTFTC 90% limitation rule. In such a case, the taxpayer may want to opt out of the Convention, pay regular U.S. tax on his U.S. source employment income, and claim Canadian foreign tax credits for such regular U.S. tax paid. He would argue that by so doing double taxation is avoided and that this is consistent with one of the objectives of the Convention.

Our position with respect to such an argument is that the Convention removes the requirement for U.S. citizens resident to Canada to pay U.S. income tax in excess of the amount that would have been paid if the taxpayer had not been a U.S. citizen. If, as a result of choosing to opt out of the Convention, a person pays more regular U.S. tax than he would have paid following the provisions of the Convention, it is our position that the excess is a voluntary payment which is not an income or profits tax for the purposes of the Income Tax Act ("the Act") and is not eligible for a tax credit to reduce Canadian tax. This is because in the case of U.S. citizens resident in Canada, the U.S. and Canada have agreed to allocate such persons' tax liabilities between the two Contracting States in the manner set out in paragraphs 4 and 5 of Article XXIV of the Convention and the Convention has removed the obligation to pay excess regular U.S. taxes.

By following the provisions of the Convention a U.S. citizen resident in Canada may be subject to U.S. AMT and, as a result, double taxation may occur. Granted that such a person is required to pay AMT which results in double taxation, we do not feel that it is the Convention or the position on voluntary tax payment set out above that "creates" such double taxation. Instead, it is the provisions of section 59(a)(2) of the Internal Revenue Code of the U.S. that limit the AMTFTC to 90% of the tentative minimum tax computed under the AMT rules that causes double taxation. In enacting such a rule, the U.S. undermines its obligations under the Convention. This is clearly illustrated by the case of a U.S. citizen resident in Canada who has only Canadian source income prior to the application of the resourcing rule under paragraph 3 of Article XXIV of the Convention. If such income is earned by a resident of Canada who is not a U.S. citizen, by virtue of the Convention, the U.S. could not tax such income. It is clear why the Convention does not require Canada to grant a credit for U.S. tax on such income and why the Act does not provide for a foreign tax credit with respect to such income. Thus, to avoid double taxation, it is equally clear why the U.S. should grant full credits for Canadian tax on such income. As mentioned above, in such a case even if the person opts out of the Convention, this double taxation of Canadian source income would still occur as a result of the application of the AMTFTC 90% limitation rule.

AMT which results of the AMTFTC 90% limitation rule in situations such as that described in the example above is attributable on a pro rata basis to Canadian source income and to U.S. source income resourced to Canada. As Canada is prepared to grant a foreign tax credit for such AMT paid on U.S. source income, the only double taxation would be to the extent of the portion of AMT on Canadian source income. To accept that such taxpayer be allowed to opt out of the Convention and to claim a Canadian foreign tax credit for regular U.S. tax paid on U.S. source income resourced to Canada to reduce his overall tax burden would, at least to the extent of the AMT on Canadian source income, be tantamount to accepting a tax credit for U.S. taxes on Canadian source income.

AMT and Canadian Foreign Tax Credit

In situations where U.S. source income not resourced to Canada is less than 10% of all the taxpayer's income, we have received enquiries concerning (i) whether a resident of Canada who is a U.S. citizen can treat AMT as a non-business-income tax for Canadian foreign tax credit purposes and (ii) whether the claim for MTC in a particular year would affect the U.S. tax otherwise payable used in computing Canadian foreign tax credit.

We will examine the first issue under four scenarios with different sources of income, namely,

(i)the taxpayer has only Canadian source income;

(ii)in addition to Canadian source income, the taxpayer has also U.S. source income all of which is resourced to Canada under the provisions of the Canada-U.S. Income Tax Convention (the "Convention") (i.e., there is no U.S. source income which is not resourced to Canada);

(iii)the taxpayer has both Canadian and U.S. source income where the U.S. source income is not resourced to Canada; and

(iv)the taxpayer has both Canadian and U.S. source income. Some U.S. source income is resourced to Canada under the provisions of the Convention while the balance of the U.S. source income is not resourced to Canada.

In the following analysis, we assume that if full U.S. foreign tax credit is granted, such tax credit would eliminate all regular U.S. taxes on Canadian source income and U.S. source income resourced to Canada¹⁰ (i.e., we assume that the tax rates in Canada are higher than those in the U.S.). For the sake of simplicity we also assume that AMT arises solely because of the AMTFTC 90% limitation rule (i.e., for example, we do not deal with any situation where AMT is a result of exclusion and/or deferred preferences).¹¹ As a result, the AMT that has so arisen is imposed not in accordance with the Convention.

In this paper whenever an income source from a particular country is referred to, it means the net income of a source from that country after any deduction allocatable to such income from that source. In other words, an expense specifically related to earning income of a source will be deducted to determine net income from that source. If the deduction is general in nature such as the standard deduction or certain itemized deductions not directly related to a specific source of income, the deduction will be allocated proportionally to income of each source to arrive at net income from a particular source. This concept is important because if after the allocation of deductions there is no income from a particular source, we would not consider that there is income from that source for purposes of the following analysis.

With respect to the sourcing of an income item, paragraph 3 of Article XXIV of the Convention provides that, for the purposes of that Article, income, profits or gains of a resident of Canada that may be taxed in the U.S. in accordance with the Convention are deemed to arise in the U.S. and those which may not be taxed in the U.S. in accordance with the Convention are deemed to arise in Canada. This sourcing rule applies without regard to the savings clause in paragraph 2 of Article XXIX of the Convention. Therefore, income, profits or gains of a Canadian resident who is a U.S. citizen that would not have been taxed in the U.S. if the resident of Canada were not a U.S. citizen are deemed to arise in Canada (i.e., U.S. source income resourced to Canada). An example of such income is employment income earned by a resident of Canada where the employment was exercised in the U.S. but either the amount of the remuneration did not exceed $10,000 in Canadian currency or the person was present in the U.S. for less than 183 days in a calendar year and the remuneration was not borne by an employer resident in Canada or a permanent establishment of the employer in Canada.

Paragraphs 4 and 5 of Article XXIV of the Convention also require that the U.S. grant a foreign tax credit in respect of certain U.S. source income that is not resourced to Canada pursuant to the sourcing rule described above. In general this income consists of U.S. source pension income, U.S. source income that would not be subject to tax under the Code without regard to the Convention if paid to a resident of Canada who was not a U.S. citizen and U.S. source interest, dividends and royalties to which paragraph 5 of Article XXIV of the Convention applies. Paragraph 6 of Article XXIV provides the U.S. with the authority to resource a certain amount of such U.S. source income to Canada, for the purpose of granting under the Code the credit required by the Convention in respect of Canadian taxes paid on such U.S. source income. The amount of such U.S. source income resourced to Canada would be the amount of such income that would generate an amount of regular U.S. tax equal to the amount of the required credit for Canadian taxes paid on such income. Assume for example that on $100 of U.S. source pension income paragraph 4(b) of Article XXIV requires that the U.S. grant a foreign credit of $25 and the U.S. tax rate is 40%. The amount of such income resourced to Canada would be $62.50.

The application of these sourcing rules is illustrated in Examples A and D in the commentary on Article XXIV in the Technical Explanation of the Convention and in the examples discussed below.

In Examples A to E attached, the U.S. income tax rates used are those for the year of 1995. For simplicity sake we only show the situation of an individual whose filing status is single.

(I)Canadian Source Income Only

Where a U.S. citizen resident in Canada (the taxpayer) has only Canadian source income, he may be required to pay AMT as a result of the application of the AMTFTC 90% limitation rule. In Example A attached, regular U.S. tax is computed to be nil while TMT is $4,917 merely because full AMTFTC cannot be claimed because of the AMTFTC 90% limitation rule, resulting in AMT of $4,917.^(f12) In such a case, no Canadian foreign tax credit would be granted for such AMT paid or accrued to the U.S. because by virtue of paragraph (d) of the definition of "non-business-income tax" under subsection 126(7) of the Act, such AMT is not a non-business-income tax because it is imposed on Canadian source income. In accordance with paragraph 4 of Article XXIV of the Convention, the U.S. should have granted a full credit for the Canadian income tax and there should not have been any U.S. tax. The AMT imposed by the U.S. under the Code notwithstanding their treaty obligations creates double taxation in this case in spite of the Convention.

(II)Combination of Canadian Source Income and U.S. Source Income all of which is Resourced to Canada By Virtue of the Convention

In the case of income sourced to the U.S. which by virtue of the provisions of the Convention has been resourced to Canada, the U.S. would treat such income for its foreign tax credit purposes as income sourced outside the U.S. and would provide a foreign tax credit for such income. Because of the resourcing rule in the Convention, the taxpayer would have no income arising in the U.S. for purposes of Article XXIV of the Convention and Canada would not be obliged to provide a tax credit for any U.S. tax paid on such income pursuant to paragraph 4(a) of Article XXIV of the Convention. Therefore, the Convention removes the obligation of a Canadian resident to pay U.S. income tax in excess of the amount that would have been paid under the Convention. As discussed above, if as a result of choosing to opt out of the Convention a person pays more regular U.S. tax than he or she would have paid following the provisions of the Convention, it is our position that the excess is a voluntary payment which is not an income or profits tax for the purposes of the Act and is not eligible for a tax credit to reduce Canadian tax. However, if as a result of following the provisions of the Convention AMT arises because of the application of the AMTFTC 90% limitation rule, such AMT is not a voluntary tax because it is imposed in spite of the Convention. For the purposes of the Act, the AMT is an income or profits tax and the U.S. source income (whether or not resourced for the purposes of the Convention to Canada) is foreign source income. Therefore, the portion of the AMT attributable to such U.S. source income is a non-business-income tax and is creditable for Canadian tax purposes. In Example B attached, assume that the taxpayer has Canadian source income of $250,000 and U.S. source income resourced to Canada of $20,000. The amount of the AMT illustrated in Example B is the same as that shown in Example A. In Example B, only that portion of the AMT (i.e. $492) on U.S. source income resourced to Canada is creditable for Canadian tax purposes. AMT in respect of Canadian source income is not creditable.

In Example B, if the taxpayer opts out of the Convention, there would not be any AMT liability as regular U.S. tax would be greater than TMT (see Example B for further details). Under such circumstances, Canada would be requested to grant a tax credit for the regular U.S. tax paid of $5,907 in respect of U.S. source income. However, as mentioned above, it is our view that if a taxpayer opts out of the Convention, the regular U.S. tax he or she pays in excess of what he or she is required to pay under the Convention will not be considered as income or profits tax for the purposes of the definition of "non-business-income tax". To not uphold this position and allow a tax credit for such regular U.S. tax would be tantamount to allowing a credit for U.S. tax paid on Canadian source income because $4,425 of the AMT in Example B is attributable to Canadian source income. Furthermore, such amount represents double taxation caused by the U.S., not Canada, as the AMT is imposed by the U.S. in contravention of the Convention.

However, in the case of U.S. source dividends, interest or royalties to which paragraph 5 of Article XXIV of the Convention apply and with respect to which Canada must allow an equivalent to the subsection 20(11) deduction and the U.S. is obliged to grant a tax credit for Canadian taxes paid on such income, no additional tax credit or deduction with respect to the AMT on such income which arises solely as a result of the AMTFTC 90% limitation rule would be allowed except to the extent by which 15% of such income exceeds the amount of tax credit that has already been granted for regular U.S. tax on such income. Therefore, in the case of U.S. source dividends, such AMT is generally not creditable for Canadian tax purposes because usually a Canadian foreign tax credit of 15% of such income has already been granted by Canada with respect to regular U.S. tax. In the case of U.S. source interest or royalties received after 1995, since the foreign tax credit that Canada is obliged to provide under paragraph 5(b) of Article XXIV of the Convention is 10% of such income and since under the Act such foreign tax credit could be provided to the extent of 15% of such income, the AMT on such types of resourced income to the extent of 5% of such income would be creditable for Canadian tax purposes. There is no requirement for further credit or deduction because the total of the equivalent to the subsection 20(11) deduction and the tax credit granted by Canada is in excess of the actual U.S. taxes, including the AMT, paid on such income.

For example, assume that the taxpayer has U.S. source dividend income of $800, adjusted taxable income of $20,000 for U.S. tax purposes, and U.S. tax otherwise payable (before foreign tax credit) of $8,000. The portion of U.S. tax otherwise payable before credit for Canadian tax in respect of the dividend income is, therefore, $320.^(f13) The treaty rate on such dividend is 15% of $800 or $120. Assume that Canadian tax after foreign tax credit on such dividend is greater than $200.^(f14) The U.S. is obliged to grant a tax credit for Canadian tax paid but is not required to lower its regular tax below $120. Therefore, in this case the U.S. credit is $200.^(f15) In order to grant such a credit, for U.S. tax purposes, an amount of $500^(f16) of the dividend is deemed to be sourced to Canada. Even though the regular U.S. tax (before U.S. AMT) actually paid is only $120, Canada will allow an equivalent to the subsection 20(11) deduction of $200.^(f17) Thus, even after adding the AMT¹⁸, if any, on the resourced portion of the dividend to the regular U.S. tax of $120, Canada will have already taken into account a greater amount of U.S. tax than that which was actually paid. Therefore, no further deduction or credit should be allowed for the AMT, if any, on such income.

Let us look at another example. Assume that all the data of the above example are the same except that the U.S. source income is interest instead of dividend. In this case, assuming that the Canadian tax on the interest is greater than $240, the U.S. tax credit will be $240.^(f19) The equivalent to the subsection 20(11) deduction will remain as $200. If AMT on the resourced interest income arises and it arises solely as a result of the AMTFTC 90% limitation rule, such AMT, to the extent that it does not exceed 5% of the gross amount of the interest, is creditable for Canadian tax purposes.

(III)A Combination of Canadian and U.S. Source Income not resourced to Canada

The issue becomes more complicated when there is a combination of Canadian and U.S. source income not resourced to Canada. In order to illustrate the point, we assume in Examples C and D attached that net employment income from Canadian source is $180,000 (i.e., after claiming foreign earned income exclusion of $70,000 in the U.S.). We further assume that employment income from the U.S. which is not resourced to Canada is $20,000 in Example C and $15,000 in Example D, respectively.

As you will see in Example C attached, there is no AMT liability (i.e., in that example, regular U.S. tax of $5,907 is greater than TMT of $4,917). Since full U.S. foreign tax credit of $53,159 is claimed, regular U.S. tax of $5,907 can be said to be attributable to U.S. source income of $20,000.^(f20) As such, Canada would grant a tax credit for regular U.S. tax of $5,907 paid in respect of such U.S. source income. Note that as the U.S. source income of $20,000 represents 10% of the total net income of $200,000 (i.e. after the U.S. foreign earned income exclusion of $70,000), AMTFTC is fully granted in that example (i.e. not restricted by the AMTFTC 90% limitation rule as the application of that rule has no adverse effect on the amount of AMTFTC claimed).

We would arrive at the same conclusion if the U.S. source income not resourced to Canada exceeds 10% of the net income from all sources because full AMTFTC would have been claimed on Canadian source income and U.S. source income resourced to Canada (i.e. the AMTFTC 90% limitation rule would not have any adverse effect) and regular U.S. tax would be greater than TMT, resulting in no AMT liability.

The result is different if the U.S. source income is $15,000 (i.e., representing less than 10% of the net income of $200,000 from all sources). In Example D attached, we assume the U.S. source income not resourced to Canada is $15,000 and the net Canadian source income (i.e., after the U.S. foreign earned income exclusion of $70,000) is $185,000. In that example, AMT is $487 (i.e. TMT of $4,917 minus regular U.S. tax of $4,430). Had full AMTFTC been allowed, TMT would have been $3,688^(f21) which would have been less than regular U.S. tax of $4,430. In other words, there would not have been any AMT liability if full AMTFTC were allowed. Consequently, AMT of $487 arises solely because of the AMTFTC 90% limitation rule. As the AMTFTC is granted in the U.S. only against non-U.S. source income, such AMT can, therefore, be considered to be all attributable to income from Canadian source on which the U.S. foreign tax credit is limited because of the application of the AMTFTC 90% limitation rule. As such, the AMT would not be creditable for Canadian foreign tax credit purposes and represents double taxation of Canadian source income. The amount of the U.S. tax creditable in Canada in Example D would be $4,430 which is the regular U.S. tax in respect of U.S. source income of $15,000. Examples C and D further illustrate that double taxation is caused by the U.S. AMT which is assessed in contravention of the Convention.

(IV)A Combination of Canadian Source Income and U.S. Source Income where Only Some U.S. Source Income Is Resourced to Canada

In Example E we assume that net Canadian source income (i.e. net of U.S. foreign earned income exclusion of $70,000) is $160,000, U.S. source income which is resourced to Canada under the Convention is $25,000 and U.S. source income not resourced to Canada is $15,000. In that example, we have the same result as in Example D, i.e., there is an AMT liability of $487. Without the AMTFTC 90% limitation rule, TMT would have been $3,688 which would have been less than regular U.S. tax of $4,430 and there would not have been any AMT liability. The AMT liability is attributable to both Canadian source income and U.S. source income resourced to Canada. Out of the amount of the AMT of $487, $66 (i.e. $487 x $25,000/$185,000) is reasonably considered to be attributable to U.S. source income which has been resourced to Canada. The balance of the AMT of $421 (i.e. $487 minus $66) is attributable to Canadian source income. The amount of he U.S. tax creditable in Canada in Example E would be $4,496 (i.e., regular U.S. tax of $4,430 in respect of U.S. source income not resourced to Canada plus AMT of $66 in respect of U.S. source income resourced to Canada).

In Example E, if the taxpayer opts out of the Convention, there would not be any AMT liability because regular U.S. tax would be greater than TMT (see further details in Example E attached). Canada would be requested to grant a credit for U.S. taxes of $7,383 paid on a voluntary basis on U.S. source income which the Convention resourced to Canada. In such a case it would seem inappropriate for Canada to grant such a credit because out of $487 U.S. AMT, $421 is on Canadian source income. Furthermore, taking into account of the tax credit and sourcing rules in the Convention, there does not appear to have any justification for the taxpayer in Example D to be treated differently from the taxpayer in Example E simply because the taxpayer in Example E, who has the same amount of total income as the taxpayer in Example D, has $25,000 U.S. source income resourced to Canada.

It should also be noted that in Example E if U.S. source income not resourced to Canada was $20,000 and net Canadian source income was $155,000, there would not be any AMT. In such a case it could not be argued that regular U.S. tax on U.S. source income resourced to Canada should not be considered a voluntary tax because of the AMT.

Recommendation

Whether or not a taxpayer would be subject to AMT if the taxpayer opts out of the Convention, we recommend that Canada not grant any credit for that portion of regular U.S. tax which could be considered to be a voluntary tax (i.e. not income or profits tax) because the Convention removes the legal obligation of the taxpayer to pay such a tax.

Where AMT arises solely as a result of the application of the AMTFTC 90% limitation rule, we recommend that the aggregate of the amount of the regular U.S. tax on U.S. source income not resourced to Canada²² and, except as noted below,²³ that portion of the AMT which is attributable to U.S. source income resourced to Canada pursuant to paragraphs 3 and 6 of Article XXIV of the Convention be creditable for Canadian tax purposes. The balance of the AMT which is attributable to Canadian source income should not be creditable against Canadian income taxes in the year incurred. However, such portion of the AMT may be taken into account in subsequent years when U.S. AMT is carried forward for U.S. tax purposes to be claimed as a credit against future regular U.S. tax. For further detail, please refer to the comments under heading "Credit for Prior Year Minimum Tax and Canadian Foreign Tax Credit" below.

The reason for allowing Canadian tax credit for U.S. AMT on U.S. source income resourced to Canada under the Convention is that the recovery of such AMT by a taxpayer who remains as a resident of Canada is not assured. This approach may be considered generous but where there is a double tax problem because of AMT, this approach makes it evident that the sole responsibility for double taxation of Canadian source income is that of the U.S. It is recognized that a taxpayer who is a U.S. citizen resident in Canada may become a U.S. resident in the near future and may, as a result, be able to claim MTC to reduce his regular U.S. tax.

We recommend the following step in determining Canadian foreign tax credit.

Steps to Follow in Determining Canadian Foreign Tax Credit

1.Go through steps 1 to 6 in Appendix D of the paper "Some Aspects of Taxation of U.S. Citizens Resident in Canada" to determine the amount of Canadian foreign tax credit that Canada is required to provide under paragraphs 4(a) and 5(b) of Article XXIV of the Convention before taking any U.S. AMT into account.

2.Ensure that the U.S. provides the correct amount of credits for Canadian tax under paragraphs 4(b) and 5(c) of Article XXIV of the Convention²⁴ in determining the regular U.S. tax (i.e., U.S. tax after foreign tax credit but before AMT).

3.Examine the computation of U.S. AMT in terms of whether the AMT arises solely as a result of the AMTFTC 90% limitation rule. If the AMT results from other than the AMTFTC 90% limitation rule, refer the file to Income Tax Rulings and Interpretations Directorate in Head Office for further analysis. If the AMT is solely attributable to the AMTFTC 90% limitation rule, provide additional Canadian tax credit for U.S. AMT only on U.S. source income resourced to Canada pursuant to paragraphs 3 and 6 of Article XXIV of the Convention.²⁵ It should be noted that this additional credit should not be mixed up with the credit provided by Canada described in 1 above. See Example G attached for an illustration of how to compute that portion of the AMT which is creditable for Canadian tax purposes.

Credit for Prior Year Minimum Tax and Canadian Foreign Tax Credit

As noted in the introductory comments above, for U.S. tax purposes, a certain portion of AMT can be carried forward indefinitely to be claimed as a credit against U.S. regular income tax liability in a subsequent year to the extent that U.S. regular income tax liability exceeds TMT in that year.²⁶ Such a credit is known as "Credit for Prior Year Minimum Tax" ("MTC") in the U.S. The amount of AMT of prior years that can be carried forward and claimed as MTC in a particular year for U.S. tax purposes is the lesser of

(i) prior years' AMT arising not because of exclusion preferences (permanent differences) less the aggregate amount of MTC claimed in prior years,²⁷ and

(ii) the amount by which

(a) U.S. regular income tax liability for the year (i.e., amount of tax on line 40 of Form 1040 (for 1995) less all the credits on lines 41 to 44 including foreign tax credit on line 43 except MTC on line 44(c))²⁸

			exceeds

(b) TMT (net of AMTFTC) for the year.

In other words, MTC can only be claimed where U.S. regular income tax liability exceeds TMT. In the year MTC is claimed, U.S. regular income tax liability must exceed TMT.

In the case where a MTC is claimed, the U.S. tax otherwise payable before the MTC claim arguably represents an income or profits tax paid for the year. However, a question arises as to what should be the amount of the U.S. tax otherwise payable for the purposes of determining "CitizenTax"²⁹ of a particular item of U.S. source income: is it the U.S. tax otherwise payable before the claim for the MTC or after such claim?

If the U.S. tax otherwise payable (i.e., U.S. tax before foreign tax credit and MTC but after all other credits) in the year a MTC is claimed is used for the purpose of computing Canadian foreign tax credit granted under paragraphs 4 and 5 of Article XXIV of the Convention, it may result in double counting the foreign tax credit to the extent that Canadian foreign tax credit has already been granted for the portion of the AMT which is attributable to U.S. source income resourced to Canada in the year the AMT was incurred (see the recommendation above). In addition, in the case of U.S. source dividends, interest or royalties, as discussed above a foreign tax credit and the equivalent to the subsection 20(11) deduction have already been allowed on the basis of the U.S. tax otherwise payable (which is greater than the aggregate of the regular U.S. tax and the AMT actually paid) on such income such that it does not make sense to grant a further foreign tax credit on the resourced portion of such income.

For Canada to grant a foreign tax credit under the Act, two basic conditions, among others, are that no Canadian foreign tax credit will be granted on Canadian source income and no Canadian foreign tax credit will be granted for foreign income taxes to the extent such tax credit has previously been granted. These principles should apply to the granting of Canadian foreign tax credit for U.S. tax otherwise payable for the year in which a MTC is claimed in the U.S.

There appears to be no problem to meet the first basic condition described above. The regular U.S. tax (after foreign tax credit but before the claim for MTC) that is otherwise payable in the year can be said to be in respect of U.S. source income as the foreign tax credit system in the U.S. would have eliminated the U.S. tax on Canadian source income (including U.S. source income resourced to Canada) based on the premise that the Canadian tax rates are higher than the U.S. tax rates. Hence, the U.S. tax otherwise payable before the claim for MTC in the year in which MTC could be claimed is not attributable to Canadian source income or U.S. source income resourced to Canada.

The second basic condition described above may cause some concern. If AMT arises solely because of the AMTFTC 90% limitation rule, all the AMT can be said to be attributable to Canadian source income or U.S. source income resourced to Canada.³⁰ As mentioned above Canadian foreign tax credit may have already been granted for AMT attributable to U.S. source income resourced to Canada. As such, if Canadian foreign tax credit is again granted for the U.S. tax otherwise payable in the year MTC is claimed, there is a potential of double counting that portion of the foreign tax credit. To avoid the potential of granting double tax credits, one would need to reduce the U.S. tax otherwise payable that is used to compute CitizenTax by that portion of the MTC claim that represents AMT for which Canadian tax credit has previously been granted. In order to do this, the taxpayer must determine the amount of the AMT that is available for carry forward for Canadian tax purposes (the "Cdn. AMT C/F"). By allowing the MTC claim to be considered to come out of the portion of the AMT attributable to Canadian source income first, the Cdn. AMT C/F can be determined by adding to the account each year in which the AMT is paid the portion of that AMT attributable to Canadian source income and by deducting from the account each year in which a MTC is claimed an amount equal to the lesser of the MTC claim for that year and the balance of the Cdn. AMT C/F account at the end of the preceding year. It follows that in a year in which a MTC is claimed, for the purposes of computing CitizenTax, U.S. tax otherwise payable for those purposes should be reduced, if any, by the excess of the MTC claim over the balance of the Cdn. AMT C/F account at the end of the preceding year. The following example illustrates this point.

Assume that in 1991, 1993 and 1994 there were AMT liabilities of $6,000, $2,000 and $7,500, respectively. Of these AMT liabilities the amounts attributable to Canadian source income were $4,000, 1,500 and 5,500, respectively. The taxpayer claimed MTC in 1992 and 1995 of $5,000 and $6,500, respectively. The portions of the MTC claimed that can reasonably be regarded as relating to Cdn. AMT C/F are $4,000 in 1992 and $6,500 in 1995. Therefore, the U.S. tax otherwise payable would be reduced for Canadian foreign tax credit purposes by the amount by which the MTC claimed exceeds the Cdn. AMT C/F (in this example, $1,000 in 1992 and nil in 1995).

Year AMT AMT - Cdn. MTC MTC-Cdn. AMT CDN.

Paid Source Inc. Claimed Account C/F AMT C/F

1991 6,000 4,000 - - 6,000 4,000
1992 - - 5,000 4,000 1,000 -
1993 2,000 1,500 - - 3,000 1,500
1994 7,500 5,500 - - 10,500 7,000
1995 - - 6,500 6,500 4,000 500

As you may notice, Cdn. AMT C/F in 1992 is nil and in 1995 is $500. If MTC is claimed in 1996 in excess of $500, the excess would reduce the U.S. tax otherwise payable for 1996 for Canadian foreign tax credit purposes.

Let us look at another example. Assume that AMT carryforward is $1,000 of which $200 is attributable to AMT on U.S. source income resourced to Canada for which Canadian foreign tax credit has already been granted. Cdn. AMT C/F is, therefore, $800 (i.e. $1,000 minus $200). Also assume that U.S. regular income tax liability exceeds TMT by $950 in the current year, so MTC of $950 is claimed. In this case the U.S. tax otherwise payable for the purpose of determining CitizenTax should be reduced by $150 which is the amount by which the MTC claim of $950 exceeds Cdn. AMT C/F of $800. After the claim for MTC of $950, AMT carryforward of $50 will still be available for U.S. tax purposes for future claim as MTC, but for Canadian foreign tax credit purpose, the balance of Cdn. AMT C/F is nil. If U.S. regular income tax liability exceeds TMT by $50 or more in the immediately following year, MTC claim for U.S. tax purpose would be $50. For Canadian tax credit purpose, the U.S. tax otherwise payable for that year would be reduced by $50.

See Example F attached for an illustration of the computation of CitizenTax on a particular item of U.S. source income not resourced to Canada in a year MTC is claimed by taking into account the potential reduction of the U.S. tax otherwise payable in computing CitizenTax.

Recommendation

While U.S. tax otherwise payable before the MTC claim is an income or profits tax, it is recognized that a portion or all of the MTC claimed in a particular year may represent AMT carryforward for which Canadian foreign tax credit has already been granted. To avoid duplication of foreign tax credit, for Canadian foreign tax credit purposes, we recommend that the amount of the U.S. tax otherwise payable (before U.S. foreign tax credit and MTC) for the purposes of computing CitizenTax on a particular item of U.S. source income of a U.S. citizen resident in Canada be reduced to the extent that MTC claimed exceeds the Cdn. AMT C/F.

Example A

(Income Only From Canadian Sources)

U.S. U.S.

Reg. Tax TMT

Salary from Canadian source 270,000 270,000
Foreign income exclusion (70,00o) (70,000)
Standard deduction (3,900) -
Personal exemption (2,500) -
AMT Exemption Amount - (11,875)^(f31)
Taxable Income 193,600 -
Alternative Minimum Taxable Income (AMTI)188,125

Income taxes 59,066 49,175
foreign tax credit (59,066)
AMTFTC - (44,258)
Regular tax 0
TMT 4,917

AMT 4,917

There would not be any foreign tax credit granted by Canada for the AMT paid in the U.S. because the U.S. tax paid by a U.S. citizen on Canadian source income does not qualify as a non-business-income tax for Canadian foreign tax credit purposes by virtue of paragraph (d) of the definition of "non-business-income tax" under subsection 126(7) of the Act. To the extent that there is double taxation it is caused by the U.S. AMT rules.

Example B

(Canadian Source Income and U.S. Source Income Resourced to Canada)

U.S. U.S.

Reg. Tax TMT

Salary from Canadian source 250,000 250,000
Salary from U.S. source but resourced
to Canada under the Convention 20,000 20,000
Foreign income exclusion (70,000) (70,000)
Standard deduction (3,900) -
Personal exemption (2,500) -
AMT Exemption Amount - (11,875)
Taxable Income 193,600
Alternative Minimum Taxable Income (AMTI)188,125

Income taxes 59,066 49,175
foreign tax credit (59,066)
AMTFTC - (44,258)
Regular tax 0
TMT 4,917
AMT 4,917

In this example, the U.S. is obliged under the Convention to grant foreign tax credit on all income (including income originally sourced in U.S. but resourced to Canada under the Convention). If the AMTFTC provisions did not contain the AMTFTC 90% limitation rule, there would not have been any AMT in this case because AMTFTC would be granted for all income including U.S. income resourced to Canada. However, the AMTFTC 90% limitation rule results in an AMT liability of $4,917. Thus the AMT of $4,917 is levied on both Canadian and U.S. source income resourced to Canada under the Convention.

In this example, the portion of the AMT attributable to U.S. source income resourced to Canada is $492 (i.e., $4,917 x $20,000/$200,000). The remainder (i.e. $4,425) of the AMT is on Canadian source income.

If the taxpayer opts out of the Convention and treats the resourced income as U.S. source income not resourced to Canada, there would not have been any AMT liability as regular tax would have been $5,907 (i.e., $59,066 - ($59,066 x $180,000/$200,000)) which would have been greater than TMT of $4,917.^(f32) This result is similar to that shown in Example C attached. However, the U.S. AMT does not alter the fact that the Convention removes the obligation of the taxpayer to pay regular U.S. tax of $5,907. Thus, the requirement to pay U.S. AMT cannot be used as a reason for opting out of the Convention. If the taxpayer opts out of the Convention such that he is required to pay regular U.S. tax, we would consider such tax as a voluntary payment and therefore not creditable for Canadian tax purposes. To do otherwise (i.e., to provide a foreign tax credit) would be tantamount to allowing a foreign tax credit on Canadian source income (in this case to the extent of $4,425).

As the U.S. AMT is not a voluntary payment to the U.S. government, the portion of the AMT on U.S. source income resourced to Canada would be allowed as a credit against Canadian tax on that income. No credit would be allowed on the portion of AMT on Canadian source income. Any double taxation (the AMT of $4,425 on Canadian source income) is caused by the U.S. AMT rules.

Example C

(Canadian Source Income and U.S. Source Income Not Resourced to Canada)

U.S. U.S.

Reg. Tax TMT

Salary from Canadian source 250,000 250,000
Salary from U.S. source not resourced
to Canada 20,000 20,000
Foreign earned income exclusion (70,000) (70,000)
Standard deduction (3,900) -
Personal exemption (2,500) -
AMT Exemption Amount - (11,875)
Taxable Income 193,600
Alternative Minimum Taxable Income (AMTI)188,125

Income taxes 59,066 49,175
foreign tax credit (53,159)
AMTFTC - (44,258)
Regular tax 5,907
TMT 4,917
AMT 0

In this example U.S. source income not resourced to Canada equals 10% of total income (net of U.S. foreign earned income exclusion of $70,000). The maximum AMTFTC that can be claimed before taking into account the AMTFTC 90% limitation rule is $44,258 (i.e. the portion of TMT before AMTFTC on Canadian source income or $180,000/$200,000 x $49,175). As this amount does not exceed 90% of the TMT of $49,175 or $44,258, full AMTFTC would be granted by the U.S.

In this example there is no AMT liability because TMT (after AMTFTC) of $4,917 is less than regular U.S. tax of $5,907. There is no double taxation. As the regular tax is all on U.S. source income, all U.S. tax of $5,907 will be creditable for Canadian tax purposes.

Example D

(Canadian Source Income and U.S. Source Income Not Resourced to Canada)

U.S. U.S.

Reg. Tax TMT

Salary from Canadian source 255,000 255,000
Salary from U.S. source not
resourced to Canada 15,000 15,000
Foreign earned income exclusion (70,000) (70,000)
Standard deduction (3,900) -
Personal exemption (2,500) -
AMT Exemption Amount - (11,875)
Taxable Income 193,600
Alternative Minimum Taxable Income (AMTI)188,125

Income taxes 59,066 49,175
foreign tax credit (54,636)
AMTFTC - (44,258)
Regular tax 4,430
TMT 4,917
AMT 487

If the AMTFTC provisions did not contain the AMTFTC 90% limitation rule, the AMTFTC would have been $45,487 (i.e. $49,175 x $185,000/$200,000) instead of $44,258 (i.e. 90% of $49,175), a difference of $1,229. Therefore, if full amount of the AMTFTC were allowed, the TMT would have been $3,688 (i.e., $49,175 minus $45,487) which would have been less than the regular tax of $4,430. Since the amount of $1,229 is greater than the AMT of $487, it can be said that the AMT of $487 arises because of the AMTFTC 90% limitation rule and can be considered to be all attributable to Canadian source income. Thus, it is not a non-business-income tax. To the extent that there is double tax ($487) it is caused by the U.S. AMT rules. The result would be the same if the taxpayer opts out of the Convention. U.S. AMT arises in spite of the Convention not because of the Convention.

Example E

(Canadian Source Income with Some U.S. Source Income Resourced to Canada and Some Not Resourced to Canada)

U.S. U.S.

Reg. Tax TMT

Salary from Canadian source 230,000 230,000
Other U.S. source income resourced
to Canada 25,000 25,000
Salary from U.S. source not
resourced to Canada 15,000 15,000
Foreign earned income exclusion (70,000) (70,000)
Standard deduction (3,900)
Personal exemption (2,500)
AMT Exemption Amount (11,875)
Taxable Income 193,600
Alternative Minimum Taxable Income (AMTI)188,125

Income taxes 59,066 49,175
foreign tax credit (54,636)
AMTFTC - (44,258)
Regular tax 4,430
TMT 4,917
AMT 487

If there were no AMTFTC 90% limitation rule, AMTFTC would have been $45,487 (i.e. $49,175 x $185,000/$200,000) instead of $44,258 (which is 90% of $49,175), a difference of $1,229. Therefore, if full amount of the AMTFTC were allowed, there would not have been any AMT liability because the TMT would have been $3,688 (i.e., $49,175 minus $45,487) which would have been less than the regular tax of $4,430. Since the amount of $1,229 is greater than the AMT of $487, it can be said that the AMT of $487 arises because of the AMTFTC 90% limitation rule and can be considered to be all attributable to Canadian source income. Out of the amount of the AMT of $487, $66 (i.e. $487 x $25,000/$185,000) can be said to be attributable to U.S. source income which is resourced to Canada under the Convention. The amount of U.S. tax eligible for Canadian foreign tax credit would be the regular tax of $4,430 on U.S. source income not resourced to Canada plus AMT of $66 on U.S. source income resourced to Canada for a total of $4,496.

If the taxpayer opts out of the Convention, there would not be any AMT liability because regular tax would be $11,813 (i.e., $59,066 - ($59,066 x $160,000/$200,000)) which would be greater than TMT of $9,835 (i.e., $49,175 - ($49,175 x $160,000/$200,000)). However, of the amount of $11,813, $7,383^(f33) is a voluntary tax for which no Canadian foreign tax credit would be granted. It does not seem appropriate that U.S. AMT of $487 ($421 of that is on Canadian source income) would cause Canada to accept a voluntary tax of $7,383 as income or profits tax for Canadian foreign tax credit purposes.

Example F

Computation of CitizenTax on a Particular Item of U.S. Source Income Not Resourced to Canada in the year MTC is Claimed

Assume the following in U.S. dollars:

(a)U.S. source business income is $20,000;
(b)U.S. source dividend income is $5,000;
(c)total adjusted taxable income for U.S. tax purposes is $60,000;
(d)U.S. tax otherwise payable before U.S. foreign tax credit and MTC is $24,000;
(e)U.S. foreign tax credit is $10,000;
(f)U.S. regular income tax liability (after foreign tax credit and other credits except MTC) is $14,000;
(g)TMT (after AMTFTC) is $6,000;
(h)AMT carryforward for U.S. tax purposes is $9,000 while the Cdn. AMT C/F is $5,000; and
(i)MTC claimed is $8,000.

The steps to compute CitizenTax on U.S. source income are:

(1)Determine the amount, if any, of the reduction to the U.S. tax otherwise payable as a result of the MTC claim:

In this case, the amount is $3,000 which is the amount by which the MTC claim of $8,000 exceeds the amount of the Cdn. AMT C/F of $5,000.

(2)Determine CitizenTax on U.S. source business income of $20,000:

U.S. source business income x U.S. tax otherwise payable
U.S. adjusted taxable income less amount in (1)

= $20,000 x ($24,000 - $3,000)
$60,000

= $20,000 x $21,000 = $7,000
$60,000

(3)Determine CitizenTax on U.S. source dividend income of $5,000:

U.S. source dividend income x U.S. tax otherwise payable
U.S. adjusted taxable income less amount in (1)

= $5,000 x ($24,000 - $3,000)
$60,000

= $5,000 x $21,000 = $1,750
$60,000

In this example, although there is an AMT carryforward of $1,000 (i.e., AMT carryforward from previous years of $9,000 minus MTC claimed for this year of $8,000, the balance of the Cdn AMT C/F is nil. Consequently, if MTC of $1,000 is claimed in the immediately subsequent year, the U.S. tax otherwise payable for the computation of CitizenTax for Canadian foreign tax credit purposes would be reduced by $1,000. Example G

Determining the portion of AMT attributable to each item of income

Assume the following in U.S. dollars:

(a)U.S. source dividend income is $5,000;
(b)U.S. source employment income all resourced to Canada is $10,000;
(c)Canadian source income is $25,000;
(d)Total adjusted taxable income is $40,000;
(e)U.S. tax at 35% (before foreign tax credit) is $14,000;
(f)AMT which is solely because of the AMTFTC 90% limitation rule is $300;

(1)U.S. Citizentax on U.S. source dividend income

= $5,000 x $14,000 = $1,750
$40,000

(2)TreatyTax³⁴ on U.S. source dividend income = 15% of $5,000 = $750

(3)Amount of U.S. source dividend income resourced to Canada

= ($1,750 - $1,000) divided by 40% = $2,500

(4)The portion of the AMT attributable to U.S. source dividend income resourced to Canada

= $2,500 x $300 = $2,500 x $300 = $20
$2,500 + $10,000 + $25,000 $37,500

Such amount of AMT is not creditable for Canadian tax purposes for the reason mentioned in the paper.

(5)The portion of the AMT attributable to U.S. source employment income resourced to Canada

= $10,000 x $300 = $10,000 x $300 = $80
$2,500 + $10,000 + $25,000 $37,500

Such amount of AMT is creditable for Canadian tax purposes.

(6)The portion of the AMT attributable to Canadian source income

= $25,000 x $300 = $25,000 x $300 = $200
$2,500 + $10,000 + $25,000 $37,500

This amount of AMT is not creditable for Canadian tax purposes in the year it is incurred. However, it should be added to the Cdn. AMT C/F as it may be relevant for the purpose of computing CitizenTax in a subsequent taxation year if there is an amount of MTC claimed as illustrated in Example F.

endnotes

¹ This paper only deals with AMT which arises solely because of the application of the AMTFTC 90% limitation rule (see below for the explanation of this term). Foreign tax credits for AMT that arises because other reasons must be determined on a case by case basis.

² See the paper titled "Some Aspects of Taxation of U.S. Citizens Resident in Canada". It would be beneficial to have read that paper to better understand this paper.

³ Tentative minimum tax before AMTFTC is the amount referred to in (c) below

⁴ i.e., permanent difference such as standard deduction and certain itemized deductions

⁵ i.e., timing difference such as accelerated depreciation and depletion

⁶ see line 44(c) of Form 1040 (1995) and Form 8801 attached

⁷ i.e., AMT that arises not because of exclusion preferences

⁸ This income, if received by a resident of Canada who was not a U.S. citizen, could not be taxed in the U.S. pursuant to the provisions of the Convention dealing with the various types of income. Examples of such income are income from employment exercised in the U.S. which is exempt from U.S. tax under paragraph 2 of Article XV of the Convention if received by a resident of Canada who was not a U.S. citizen and U.S. source interest income exempt from U.S. tax under paragraph 3 of Article XI of the Convention.

⁹ For example, assume that a U.S. citizen resident in Canada received a U.S. source periodic pension payment of $100 and the regular U.S. tax rate on such pension is 40%. Since the rate provided by the Convention that the U.S. is allowed to tax on such income received by a resident of Canada who was not a U.S. citizen is 15%, the U.S. is obliged to provide a credit to the extent of $25 (assuming that the Canadian tax after Canadian tax credit on such income is equal to or exceeds $25). In order to provide such a credit for purposes of the Code, the U.S. would resource $62.50 of such income to Canada (i.e. $100 - (15/40 x $100) = $62.50). Example D in the commentary on Article XXIV in the Technical Explanation of the Convention illustrates this resourcing.

¹⁰ Under the Convention the U.S. is obliged to grant tax credits for U.S. taxes paid on U.S. source income resourced to Canada.

¹¹ If such a situation occurs, we will need to deal with it on a case by case basis.

¹² i.e., if there were no AMTFTC 90% limitation rule, both regular U.S. tax and TMT would have been nil and there would not have been any AMT liability.

¹³ i.e., $800/$20,000 x $8,000 = $320

¹⁴ such that the U.S. foreign tax credit for Canadian tax paid would not be less than $200

¹⁵ i.e., $320 minus $120 = $200

¹⁶ i.e., $200 divided by a tax rate of 40% which is computed as $320/$800 x 100%

¹⁷ i.e., $320 minus 15% of $800 = $320 minus $120 = $200

¹⁸ For an example to apportion AMT to U.S. resourced investment income, please refer to Example G

¹⁹ i.e., $320 minus 10% of $800 = $240

²⁰ Assume that Canadian tax rates are higher than the U.S. tax rates.

²¹ see Example D for details

²² Assuming that Canadian tax rates are higher than the U.S. tax rates, there should not be any regular U.S. tax on U.S. source income which is resourced to Canada as the U.S. foreign tax credit should render the regular U.S. tax on such income to be nil.

²³ for exception, please refer to our comments earlier on the creditability of the AMT on the portion of dividends, interest and royalties resourced to Canada under paragraph 6 of Article XXIV of the Convention under the heading "(II) Combination of Canadian Source Income and U.S. Source Income all of which is Resourced to Canada by Virtue of the Convention".

²⁴ This includes U.S. credits for Canadian tax on U.S. source income resourced to Canada and Canadian source income.

²⁵ For exception, please refer to footnote 19.

²⁶ Our limited experience in this area shows that it is not very often that such a credit would be available to a U.S. citizen who remains resident in Canada.

²⁷ The difference is the AMT carryover that is available to be claimed as MTC.

²⁸ Note that this amount may be different from "regular U.S. tax" in that this amount is the U.S. tax net of all credits except MTC while the latter is the U.S. tax less the foreign tax credit only. It is evident, therefore, that MTC is granted only if there is still a U.S. tax liability after all the other credits.

²⁹ CitizenTax on a particular item of income is the amount of tax which a U.S. citizen resident in Canada would have to pay to the U.S. under the Internal Revenue Code on that item of income before any credit for Canadian taxes on such income and before taking into account the provisions of the Convention. Also see a definition of such term in the article titled "Some Aspects of Taxation of U.S. Citizens Resident in Canada" issued by Income Tax Rulings and Interpretations Directorate.

³⁰ The AMT would not be attributable to U.S. source income not resourced to Canada. The assumption that the AMT is solely caused by the AMTFTC 90% limitation rule would preclude AMT on such type of U.S. source income because such type of income is not eligible for U.S. alternative minimum tax foreign tax credit. Such type of income would attract regular U.S. tax rather than AMT leaving the AMT, if any, to be attributable to Canadian source income and U.S. source income resourced to Canada.

³¹ AMT exemption amounts of $33,750 for a single person has been reduced because AMTI exceeds $112,500.

³² TMT = $49,175 - ($49,175 x $180,000/$200,000) = $4,917

³³ i.e., $11,813 minus regular U.S. tax of $4,430 on U.S. source income for the purpose of the Convention.

³⁴ TreatyTax on a particular item of U.S. source is the amount of tax that the U.S. would be allowed to collect on that item of income if the recipient of the income were a Canadian resident for the purpose of the Convention but not a U.S. citizen.