5 March 1993 Internal T.I. 9303427 F - Foreign Tax Credit and 20(12) Deduction

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.

March 5, 1993

Attention:  Gerrie Sholikowski

Foreign Tax Credit and Subsection 20(12) Deduction

This is in reply to your memorandum of February 4, 1993 concerning the tax treatment of tax reimbursements by the U.S. employer to the governments of Canada and the United States.

It is our understanding that an individual (XXXXXXXXXX) was on assignment in the United States for a number of years and a non- resident of Canada during the period he resided in that country. The individual returned to Canada on XXXXXXXXXX. During the period he was on assignment, his employer was responsible for any U.S. income tax liability. For United States income tax purposes the "tax reimbursement" is taxable in the year the reimbursement is actually settled or finalized. The employee's 1989 and 1990 tax reimbursements were not finalized until 1991 and were therefore included on the individual's W2 for U.S. income tax purposes.

XXXXXXXXXX

XXXXXXXXXX

You questioned whether or not the $XXXXXXXXXX (U.S.) should also be included in the individual's income for 1991 and if the amount should not be included in the individual's income, should the foreign taxes paid be prorated to reflect the portion relating to the U.S. income which is taxable in Canada.

It is a question of fact whether or not the individual was a resident of Canada in the years he was on assignment in the United States. We will respond on the basis that the individual was a non-resident of Canada and a resident of the United States for all of the 1989 taxation year and for all of the 1990 taxation year except for the period of XXXXXXXXXX.

By virtue of subsection 2(2) and section 5 of the Income Tax Act (the "Act") the taxpayer's income for a taxation year from an office or employment is the salary, wages and other remuneration...received by him in the year. Accordingly, the individual will be required to include in income all amounts received by him in the year from such sources and therefore he should have included in income only the amounts he actually received in the 1991 taxation year, namely the $XXXXXXXXXX (U.S.). The amounts reimbursed by the employer in the 1989 and 1990 taxation years, during the period when he was a non-resident of Canada, would not be taxable in Canada by virtue of subparagraph 115(1)(a)(i) of the Act since such duties were performed by him outside Canada during a period when he was a non-resident of Canada.

In addition, paragraph 1 of Article XV (Dependent Personal Services) of the Canada-U.S. Income Tax Convention ( the "Convention") provides for the 1989 and 1990 taxation years, while the individual was a non- resident of Canada and a resident of the United States, that salaries, wages and other remuneration derived by a resident of the United States in respect of employment shall be taxable only in the United States unless the employment is exercised in Canada. Since the employment was exercised outside Canada in the 1989 and 1990 taxation years, the Convention would also exclude such income from being taxed in Canada in those years.

Paragraph 126(7)(c) of the Act provides for the definition of a non- business-income tax and there is no provision therein to exclude the amount of the tax paid for the year that relates to the portion of the income which is not taxable in Canada in the year. In addition, paragraph 1 of Article XV of the Convention provides that salaries, wages and similar remuneration derived by a resident of the United States shall be taxable only in that country unless the employment is exercised in Canada. Since all of the employment was exercised in the United States, the income will be sourced in the United States for purposes of the Act and the Convention. Accordingly all of the taxes paid to the United States in the 1991 taxation year will fall within the definition of non-business-income tax in paragraph 126(7)(c) unless it is excluded by subparagraphs (iv) to (ix) of that paragraph and in accordance with subsection 126(1) of the Act such foreign taxes could be used as a foreign tax credit to the extent of the Canadian tax otherwise payable on his U.S. source income.

The balance of the non-business-income tax will be treated as follows.

Pursuant to subsection 9(2) and paragraph 3(d) of the Act, provided XXXXXXXXXX has reported an income or loss from a source which is business or property (i.e. bank interest, dividends etc.) he would be entitled to claim a deduction under subsection 20(12) of the Act. However, if the proposed legislation on subsection 20(12) of the Act is passed in its present form, a taxpayer like XXXXXXXXXX would not be entitled to claim such a deduction for the 1992 and subsequent taxation years since such deduction is sourced to a particular type of business or property income whereas presently the deduction is not sourced to any particular income and could in effect be deducted from income from employment.

In summary, provided you are satisfied that the sum of $XXXXXXXXXX (U.S.) was received by XXXXXXXXXX prior to him becoming a resident of Canada, such amounts cannot be included in his income in Canada for the 1991 taxation year. In addition, all of the taxes paid by him to the United States in 1991 will be included in the definition of non- business-income tax for purposes of paragraph 126(7)c) of the Act unless excluded therein. Accordingly, XXXXXXXXXX will be in a position to claim a foreign tax credit to the maximum permitted under subsection 126(1) of the Act. In addition. he would be entitled to claim a deduction under subsection 20(12) of the Act subject to the comments set out in the previous paragraph.

We trust the above is adequate for your purposes.

for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs Branch