IT-506 "Foreign Income Taxes as a Deduction From Income" 5 January 1987

11. … Since the rules in subsection 104(22) apply only to that subsection and to section 126, a beneficiary may not utilize the provisions of subsection 20(11) or (12) in respect of foreign taxes allocated to it under subsection 104(22).

S. 20(11) deduction is excess of the gross property income over 15% thereof

3. An individual (including a trust) who in a taxation year earns income that is

(a) not included in income from a business carried on in a foreign country, and

(b) for a particular property outside Canada that is not real property

may deal with any income or profits tax paid thereon for the year to a foreign country in the following manner:

(c) deduct under subsection 20(11) the portion, if any, of the foreign tax that exceeds 15% of the gross income for the year from the particular property; and

(d) as to the amount not deductible under subsection 20(11),

(i) deduct part or all of it under subsection 20(12) (see 5 below), and

(ii) include the part not deducted under subsection 20(12) in computing the individual's non-business-income tax for the purpose of claiming a foreign tax credit for the year under section 126.

Determination of the foreign tax paid in respect of the income from the foreign property

4. In calculating the deduction under subsection 20(11), the actual foreign income or profits taxes paid with respect to the income described in 3 above should be used where possible. On the other hand, depending on the circumstances, it may be necessary to make a determination of the foreign income or profits taxes paid which may be attributable to such property. Where it is necessary to make such a determination all the relevant facts must be taken into consideration. For example, if the foreign tax of a country is determined on gross property income, then a reasonable portion of the foreign tax relating to income from property other than real property in that country would be the proportion that the gross income from such property in that country is of the gross income from all property in that country. Conversely, if the foreign tax is calculated on the net foreign-source income in that country, the net income figures would be used in the calculation.

Interrelationship with s. 126(1)

8. Non-business-income tax that has been deducted by virtue of subsection 20(12) is excluded from non-business-income tax for purposes of paragraph 126(7)(c). That is, a deduction under subsection 20(12) requires an equivalent reduction in respect of the relevant foreign country of the non-business-income tax eligible for a foreign tax credit, the foreign non-business-income amount which is used in calculating the amount of foreign tax credit which may be claimed, and the amount of net income used in that calculation. The subsection 20(12) deduction results in tax relief at the effective tax rates, while the section 126 relief is usually available on a dollar-for-dollar basis.