7 December 2004 External T.I. 2003-0019751E5 - US Alternative Minimum Tax AMT and FTC

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: Can an individual receive a Canadian FTC for US AMT? If so, how much US AMT is creditable?

Position: Yes, under certain circumstances, most notably when some non-Canadian source income is resourced to Canada pursuant to the Canada-US Income Tax Convention and the US AMT arises due to the limitation on US foreign tax credits under the US AMT rules. The US AMT must be apportioned between Canadian and non-Canadian source income to determine what amount is eligible for a Canadian FTC.

Reasons: When non-Canadian source income is resourced to Canada some of the foreign tax credits given by the US relate to that non-Canadian source income. Consequently, where AMT arises due to the 90% limitation on US foreign tax credits, some of that AMT can be said to relate to non-Canadian source income. As the AMT is not a voluntary tax, we consider it to be creditable to the extent that it does not relate to Canadian source income.

XXXXXXXXXX 		2003-001975
			Eliza Erskine
December 7, 2004

Dear XXXXXXXXXX:

Re: U.S. Alternative Minimum Tax and the Canadian Foreign Tax Credit

This is in reply to your letter of May 13, 2003 and your recent submission of September 30, 2004. Generally, you have asked us to comment on whether a Canadian resident who is also a U.S. Citizen can recover some or all of the U.S. alternative minimum tax (the "USAMT") he or she is required to pay to the United States through a Canadian foreign tax credit (an "FTC"), notwithstanding that such tax is in contravention of the Canada-United States Income Tax Convention (the "Convention"). In particular, you have asked us to consider the decision of the Tax Court of Canada in Philip A. Meyer v. the Queen, 2004 DTC 2393 (hereafter "Meyer"), with respect to the specific issue of whether Canada can require a taxpayer to file in the United States in accordance with the Convention where this increases the taxpayer's overall tax burden and results in double taxation. You have asked us by email to consider this issue even in light of the repeal of the 90% limitation rule found in the USAMT provisions. For simplicity's sake, our reply to you generally assumes that the 90% rule is applicable. We also acknowledge our various telephone conversations with you (Erskine/XXXXXXXXXX), wherein we provided you with our initial views on this matter.

Our Comments

As discussed most recently in our technical interpretation #2004-0057875, we agree that the USAMT is not a "voluntary tax" in the sense that the Canada Revenue Agency (the "CRA") has used that term in previous written interpretations. The Kappus¹ decision confirms this view. We refer you to our October 1998 document, entitled "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" (our document #8M18146; hereafter the "USAMT Paper"), in which we commented:

"if as a result of following the provisions of the Convention AMT arises because of the application of the AMTFTC 90% limitation rule, such AMT is not a voluntary tax because it is imposed in spite of the Convention."

Thus, even prior to the Kappus decision we recognized that the USAMT is not a "voluntary tax", as the U.S. government enforces the USAMT provisions despite the fact that these provisions contravene the Convention. However, as we discussed in our telephone conversations with you (XXXXXXXXXX/Erskine), not all USAMT is eligible for the FTC. Only that USAMT which can reasonably be held to relate to non-Canadian source income will be eligible for the FTC. In our view, both under tax treaty principles and pursuant to the Act,² we cannot allow an FTC for USAMT that relates to Canadian source income.

We understand that, in your opinion, Canada is required to provide FTCs for all USAMT that is not expressly excluded from the FTC system by the Income Tax Act (the "Act"). The essential rationale for your position, as we understand it, is that a country cannot insist on the application of an income tax treaty where such application results in double taxation. Thus, the fact that the United States has contravened the Convention, resulting in the double taxation in question, does not allow Canada to refuse to accept claims for FTCs with respect to the "extra" U.S. income tax. You argue that it is against the very nature of tax treaties for Canada to insist that a taxpayer file in accordance with the Convention where that results in double taxation, especially where the Article under consideration is the Article for the "Elimination of Double Taxation".

We have reviewed your submission at length, and we acknowledge that you have set out an arguable position. We cannot agree with that position, however. In our view, our current position on this issue is quite reasonable, and provides some relief to taxpayers caught in the double taxation situation described in your submission. In particular, we do not agree with you that where one signatory to a tax treaty has contravened that treaty, the other signatory is obliged to do whatever is necessary to avoid double taxation. Therefore, we confirm that the comments set out in the USAMT paper remain our position with respect to when USAMT is eligible for the FTC. We note that where the USAMT in a particular year relates to something other than the 90% limitation on U.S. foreign tax credits (which will presumably be the case in future years), the taxpayer may be able to show that all of that USAMT is eligible for the FTC.

We do not agree with you that the obiter dicta in the Meyer decision support your argument that a taxpayer can "opt out" of a tax treaty where applying the treaty results in double taxation. The relevant passage from Meyer is as follows:

"[T]hat one might not claim discretionary deductions and voluntarily increase the tax in a foreign jurisdiction would not entitle the CCRA to deny a credit on that basis. Nor should the CCRA dictate any foreign filing position on a resident taxpayer. However, where the resident taxpayer has approached his foreign filing position without regard to providing the information necessary to determine the tax payable, such as not submitting required forms or return information to claim a Treaty entitlement, and has refused to correct the error or establish that it was not in error, the resultant overpayment can be regarded as an amount paid other than as a 'tax'."

In our view, this passage is more likely intended to suggest that the CRA cannot require a person to claim "discretionary deductions", which we take to mean things such as child-care expenses. While we are of the view that the ratio in Meyer is generally well reasoned, informal decisions of the Tax Court of Canada have no precedential value, and obiter dicta from such decisions are of limited persuasive value. With respect to the second sentence from the quote above, that "the CCRA [should not] dictate any foreign filing position on a resident taxpayer", we are of the view that even if we agreed with the statement, we would take it in the context of the rest of the judgment which emphasizes that a taxpayer is required to take a tax treaty into account in determining his foreign filing position.

We would also draw your attention to another passage from Meyer that in our view implies that the judge viewed the taxpayer's approach in that case to be contrary to the object and spirit of the Convention:

"By not claiming the benefit of the Treaty in favour of himself as a Canadian resident, the Appellant has gifted the United States Treasury a fiscal advantage that it agreed in the Treaty not to have. In self-assessing systems, it is incumbent on taxpayers to file on the basis prescribed by their circumstances."

This passage suggests to us that the judge viewed allocation of tax revenue between treaty partners as at least one of the purposes of the Convention, and would seem to support our comments in the USAMT Paper that regard must be had to this particular purpose when evaluating whether Canada should provide tax credits with respect to US tax on Canadian-source income.

We trust that our comments will be of assistance to you. If you have questions with respect to the contents of this letter please contact the officer noted above at (613) 952-1361 or (by email) at Eliza.Erskine@ccra-adrc.gc.ca .

Yours truly,

Ted Cook
A/Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
ENDNOTES

¹ Tom Kappus and Louise Kappus v. Comr., 337 F. 3d 1053 (D.C. Cir 2003).

² Paragraph (d) under the definition of "non-business income tax" in subsection 126(7) excludes from creditable non-business income tax any tax, or portion of a tax, "that would not have been payable had the taxpayer not been a citizen of [the other] country and that cannot reasonably be regarded as attributable to income from a source outside Canada."