26 January 1996 External T.I. 9516185 - MEANING OF "FOR THE YEAR" IN SECTION 126

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:

Meaning of "for the year" in 126(1)(a)

Position:

	Means the year for which the foreign income or 	profit tax is exigible in the foreign country

Reasons:

	see issue sheet with respect to file 7-942239 to 	Halfiax TSO

		951618
XXXXXXXXXX	S. Leung

Attention: XXXXXXXXXX

January 26, 1996

Dear Sirs:

Re: Section 126 of the Income Tax Act (the "Act")

We are writing in response to your letter of June 16, 1995 wherein you requested a technical interpretation with respect to the meaning of the phrase "non-business-income tax paid by the taxpayer for the year" as used in paragraph 126(1)(a) of the Act. Specifically you requested us to consider a hypothetical situation in which a Canadian resident who was a U.S. resident when units under a phantom stock plan was granted to him is required to report income with respect to such phantom stock plan in the year of the redemption of the units (the "year of redemption") for Canadian income tax purposes but such income would not be recognized in the U.S. until two years later (the "year of recognition"). It is your view that to the extent that the income subject to tax in Canada is sourced in the U.S., a foreign tax credit is available in Canada in the year of redemption notwithstanding that U.S. tax is not exigible until the year of recognition.

Our Comments

We have recently completed a review of our position with respect to the subject matter described in your letter. It is our view that in interpreting the term "for the year" as it is used in subsections 126(1) and 126(2), as well as in the definitions of "business-income tax" and "non-business-income tax" in subsection 126(7) of the Act, that term relates to the year for which the foreign income or profit tax is exigible (i.e. liable to be paid). In other words, it relates to the year for which the taxpayer is liable to pay tax to the foreign jurisdiction for the income which is considered to have been earned under the tax law of the foreign jurisdiction (the "taxable year"). The foreign income or profit tax may actually be paid before or after the taxable year but as long as it is paid for the taxable year, subject to the relevant carryover provisions for business-income tax, such tax is eligible to be claimed as a foreign tax credit, for Canadian tax purposes, for a taxation year if such taxation year for which the person is making the claim coincides with the taxable year.

In the hypothetical situation described above, for Canadian foreign tax credit purposes the income tax paid to the U.S. for the year of recognition will not be considered to be paid for the year of redemption in which the income is reported in Canada (but not reported in the U.S.). As a result, the income tax so paid to the U.S. for the year of recognition for U.S. tax purposes will not be creditable in Canada for foreign tax credit purposes for the year of redemption in which the income arises for Canadian income tax purposes.

We trust you will find the above to be of assistance.

Yours truly,

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