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: Whether a foreign tax credit is available to the taxpayer who is an individual in respect of U.S. tax paid by him on his share of income earned by a U.S. limited liability company
Position: Yes where the taxpayer is an individual and to the extent that the foreign tax has not been reduced by the application of subsections 20(11) of the Act.
The claim for the subsection 20(12) deduction would also have impact on the foreign tax credit.
Reasons: The U.S. tax is a non-business income tax for purposes of subsection 126(7) of the Act
.
XXXXXXXXXX 990077
S. Leung
Attention: XXXXXXXXXX
February 21, 2000
Dear Sirs:
Re: Foreign Tax Credit
We are writing in reply to your letter in which you inquired whether the taxpayer in the situation described below is eligible for a foreign tax credit in respect of the U.S. tax he paid. The situation is as follows:
The taxpayer who is an individual resident in Canada has controlling interests both in a Canadian-controlled private corporation as defined under subsection 125(7) of the Income Tax Act (the "Act") and in a limited liability company formed in the State of Georgia, U.S. (the "LLC"). Both these companies operate similar active businesses. The LLC has elected to be treated as a partnership for U.S. tax purposes for a particular taxation year. The taxpayer paid U.S. income tax for his share of the income earned by the LLC. The LLC is treated as a corporation for Canadian tax purposes.
The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable District Taxation Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments.
Where a Distribution of Profits Was Made by the LLC
Where there is a distribution of the profits of the LLC to the taxpayer who is an individual in the year, the distribution would be considered to be a dividend paid by the LLC for Canadian tax purposes and would be required to be included in computing the taxpayer's income for the year from the shares of the LLC. There may be deducted under subsection 20(11) of the Act in computing the taxpayer's income from the shares of the LLC an amount by which the amount of the U.S. tax paid by the taxpayer exceeds 15% of the amount of such dividend.
For example, assume that the taxpayer's share of the LLC income is $15,000 in respect of which the taxpayer paid U.S. tax of $4,500. Also assume that the LLC made a distribution of $10,000 to the taxpayer in the year. The amount that may be deducted under subsection 20(11) of the Act is:
$4,500 - (15% of $10,000) = $4,500 - $1,500 = $3,000
Whether or not a claim is made under subsection 20(11) of the Act, only U.S. tax of $1,500 will be eligible for a deduction under subsection 20(12) of the Act or a foreign tax credit under subsection 126(1) of the Act. It should be noted that a claim for the subsection 20(12) deduction would further reduce the numerator of the formula referred to in subparagraph 126(1)(b)(i) of the Act and may consequently reduce the amount of the foreign tax credit.
Where There Is No Distribution of Profits from the LLC
Where there is no distribution of profits from the LLC to a taxpayer who is an individual in the year for which the U.S. tax is paid, as there is no income from the shares of the LLC, subsection 20(11) of the Act will not apply. The taxpayer may claim a foreign tax credit for the U.S. tax paid provided that the taxpayer has income from other sources in the U.S. To the extent that the U.S. tax is not used for a foreign tax credit, as such tax paid is considered to be paid with respect to the shares of the LLC, a subsection 20(12) deduction is available regardless of whether or not the taxpayer has other U.S. source income.
We trust you will find the above to be of assistance. As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, l996, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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