3 September 1999 External T.I. 9833115 - FTC FOR U.S. ALTERNATIVE MINIMUM TAX

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 U.S. AMT is creditable

Position: It depends on the source of income

Reasons: We have stated that U.A. AMT on Canadian source income is not creditable while generally AMT on U.S. source income resourced to Canada is creditable

XXXXXXXXXX 983311
S. Leung

Attention: XXXXXXXXXX

September 3, 1999

Dear Sirs:

Re: Foreign Tax Credit in respect of U.S. Alternative Minimum Tax

We are writing in reply to your letter of December 10, 1998 in which you requested our opinion as to whether a foreign tax credit is available to the taxpayer described in the situation below.

The taxpayer is an individual who is a U.S. citizen and a resident of Canada for the purposes of the Canada-United States Income Tax Convention (the "Convention"). The taxpayer earns U.S. source pension, U.S. source interest and Canadian source interest. The Canadian source interest income is a small amount in comparison with the U.S. source pension and the U.S. source interest. The taxpayer is liable for U.S. alternative minimum tax ("AMT")

Our Comments

Whether a foreign tax credit is available in respect of AMT paid by a U.S. citizen resident in Canada is discussed at some length in our paper titled "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" (the "AMT Paper"). The final form of the Paper dated July 21, 1998 (file #8M18146) was released in October, 1998 to the public through tax services publishers such as CCH and Carswell.

As the information provided in your letter is very sketchy, the comments we offer below will be general in nature. As you are aware, under the Convention the U.S. has retained its right to tax its citizens on their world-wide income subject to certain limitations. One of the limitations which is referred to in paragraph 3 of Article XXIX of the Convention is that the U.S. will honour its obligation under Article xxiv (Elimination of Double Taxation) of the Convention. Paragraphs 4, 5 and 6 of Article XXIV of the Convention specifically govern the manner in which each Contracting State would grant credits in respect of taxes paid by U.S. citizens resident in Canada.

Generally, in the situation described in your letter, after the credits that the U.S. must provide under Article XXIV of the Convention, the U.S. source pension (assuming it is periodic) is to be subject to U.S. tax not exceeding 15% of the gross amount of the pension and the U.S. source interest (assuming it is not exempt from tax under the Internal Revenue Code or under Article XI of the Convention) is to be subject to U.S. tax not exceeding 10% of the gross amount of the interest. Canadian source interest income should not be subject to any U.S. tax after the credits granted by the U.S. under Article XXIV of the Convention Since the U.S. taxes its citizens on their world-wide income at the progressive tax rates, in order to limit its taxation on the U.S. source periodic pension payment to the rate of 15% and the U.S. source interest to the rate of 10%, the U.S. would consider, under paragraph 6 of Article XXIV of the Convention, the portion of the U.S. source income which is subject to U.S. tax in excess of what is provided under the Convention to be Canadian source income (referred to as U.S. source income resourced to Canada pursuant to the Convention) for its foreign tax credit purposes.

Under the U.S. AMT rules, a U.S. citizen resident in Canada may be subject to AMT in addition to regular U.S. tax. In such a case, the total U.S. tax (i.e., regular U.S. tax plus AMT) may be in excess of what the U.S. tax would have been under the Convention. Provided that the AMT arises solely as a result of the rule which only allows an AMT foreign tax credit not exceeding 90% of the alternative minimum tax otherwise payable, a portion or all of the AMT may be creditable for Canadian foreign tax credit purposes. The AMT which is creditable is that portion of the AMT attributable to U.S. source income resourced to Canada pursuant to the Convention. However, as discussed in the AMT Paper, only that portion of the AMI on the U.S. source interest income resourced to Canada to the extent of 5%1 of such income would be creditable. The portion of the AMT attributable to Canadian source income is not creditable.

It appears that the information provided in your letter stating that most of the income of the taxpayer is sourced to the U.S. is not consistent with the information shown on U.S. Form 1116 "Foreign Tax Credit" you provided to us. On that form, it appears that all the taxable income (before the deduction of personal exemption) of the taxpayer is shown as Canadian source income. If indeed all the income of the taxpayer is sourced to Canada, regular U.S. tax before AMT would be nil. Any AMT paid would not be creditable for Canadian tax purposes because the foreign tax paid is in respect of Canadian source income.

Yours truly,

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

1

That is the difference between the rate of 15% maximum Canadian credit on foreign property income under the Income Tax Act and the Convention rate of 10%.