21 May 2010 External T.I. 2009-0337531E5 - 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.

Principal Issues: Whether a Canadian company would be entitled to either a foreign tax credit under section 126 of the Act or a deduction under section 113 of the Act in respect of a withholding tax imposed by Costa Rica where the withholding tax is conditional on the availability of a credit in Canada.

Position: No.

Reasons: Subsection 126(4) of the Act will apply to exclude the Costa Rican withholding tax from the meaning of the term "income or profits tax" for all purposes of the Act.

XXXXXXXXXX 							2009-033753
								S. Sivarulrasa
May 21, 2010

Dear XXXXXXXXXX :

Re: Foreign tax credit

This is in response to your letter dated August 17, 2009 regarding subsection 126(4) of the Income Tax Act ("the Act") in the hypothetical circumstances described below:

• Canco is a Canadian-controlled private corporation as defined in subsection 125(7) of the Act.
• CRCO is a company incorporated and resident in Costa Rica that carries on business wholly in Costa Rica.
• Canco owns 100% of the shares of CRCO. CRCO is a controlled foreign affiliate of Canco as defined in subsection 95(1) of the Act.
• Income earned by CRCO is the result of sales on investment property. This income is considered to be foreign accrual property income to Canco and will be added to the taxable surplus balance of CRCO.
• Currently, CRCO has taxable surplus on hand as determined by the Act.
• CRCO is proposing to pay a dividend out of its taxable surplus to Canco. Pursuant to Costa Rican tax law, the dividend paid from CRCO to Canco will be subject to a 15% withholding tax only if Canco is entitled to a foreign tax credit in respect of such withholding tax.

Your question is whether Canco would be entitled to either a foreign tax credit under section 126 of the Act or a deduction under section 113 of the Act in respect of the 15% withholding tax imposed by Costa Rica on the dividend paid by CRCO.

The situation outlined in your letter appears to deal with a specific taxpayer under circumstances involving a proposed transaction, albeit a hypothetical one. It is not this Directorate's practice to comment on circumstances relating to specific taxpayers other than through an advance income tax ruling. For more details on our approach to rulings and interpretations, please see Information Circular IC 70-6R5, "Advance Income Tax Rulings", which is available through the Canada Revenue Agency ("CRA") website at www.cra-arc.gc.ca. Although we cannot comment directly on your specific situation, we are prepared to provide the following general comments.

Our Comments

It is our view that subsection 126(4) of the Act will apply to exclude the Costa Rican withholding tax described above from the meaning of the term "income or profits tax" for all purposes of the Act. Accordingly, it would not qualify as a "non-business income tax" or a "business income tax" as defined in subsection 126(7) of the Act. This means the Costa Rican withholding tax would be neither creditable under section 126 nor deductible under section 113.

We trust our comments are of some assistance.

Yours truly,

Daryl Boychuk
Manager, International Section I
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch