CRA may permit non-pro-rata sharing by partners of withholding taxes borne at partnership level

Although unclear, it appears that taxes imposed by a foreign jurisdiction under a domestic override of an existing treaty (or perhaps under a domestic anti-treaty shopping rule) qualify as "taxes" under general principles, so that the usual Canadian domestic foreign tax credit or deduction provisions apply.

In Folio S5-F2-C1, CRA indicates that the Canadian partner of a partnership which has paid foreign income tax generally is treated as paying its proportionate share of such partnership tax.  However, this statement is not intended to require a pro rata sharing of foreign withholding taxes borne on payments made to the partnership where the amount withheld is based on the withholding rate that would have applied to each partner.

Where a Canadian individual member of an LLC (which carries on an active business) receives distributions from the LLC which are sufficient only to fund his US tax liability on the LLC’s income, most of those US taxes will not be eligible for a foreign tax credit (but with eligibility for the s. 20(11) deduction).

Neal Armstrong. Summaries of Manjit Singh and Andrew Spiro, "The Canadian Treatment of Foreign Taxes," draft version of paper for CTF 2014 Conference Report under Treaties – Art. 24, s. 126(7) – non-business income, s. 20(11), 126(2), s. 104(22) and s. 113(1)(c).