20 March 1985 Income Tax Severed Letter

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.

XXXX

J. F. Oulton (613) 995-1787

March 20, 1985

Re: Canada-U.S. Income Tax Convention (1980) (The Convention)

This is in reply to your letter dated January 2 wherein you requested an interpretation regarding the above item and related provision of the Income Tax Act (the Act), in the following hypothetical situations (As suggested, foreign exchange implications are ignored):

1. An individual resident in Canada (Mr. A) owns all of the shares of a taxable Canadian corporation (Company A) which carries on business in the U.S. In 1986, Company A declares a dividend of $1,000 payable to Mr. A and a U.S. withholding tax of $150 is paid by Company A on behalf of Mr. A. The net receipt by Mr. A is therefore $850. Paragraph 7 of Article X of the Convention provides that the U.S. may levy tax under the condition set out thereunder.

Mr. A would include in income for 1986 the $1,000 of dividend income from Company A plus an additional S500 pursuant to paragraph 82(1)(b) of the Act. It has been assumed that Mr. A has total income of S100,000 for 1986 (which includes the $1,500 of dividend income from Company A).

Opinion

In computing the foreign tax credit, it is our opinion that Mr. A would be entitled to a claim based on "non-business income tax" of $150 paid to the U.S. under paragraph 126(1)(a) of the Act, and the $1,500 would be regarded as income from sources in the U.S. for purposes of subparagraph 126(1)(b)(i) of the Act. In this regard, we feel that paragraph 3(a) of Article XXIV of the Convention would deem the dividend described in paragraph 7 of Article X of the Convention to have arisen in the U.S.

2. You have asked us to assume the same facts as in 1 except that Mr. A has a loss from other sources that exceed the $1,500 of income for Canadian income tax purposes from the dividend from Company A, and therefore Mr. A has no taxable income in 1986. Because he has no tax otherwise payable under Part I for 1986 he will not be entitled to a foreign tax credit under subsection 126(1).

You questioned whether or not Mr. A would be entitled to a deduction under subsection 20(12) of the Act for the $150 of tax paid to the U.S. with respect to the dividend from Company A.

Opinion

We are in agreement with your opinion that the $150 would qualify as a deduction under subsection 20(12) of the Act, since it would be regarded as an income or profits tax paid by him for the year to a government of a country other than Canada within the meaning assigned by paragraph 126(7)(c) of the Act (read without reference to subparagraphs (iii) and (v) thereof).

3(a) You have also asked us to assume the same facts as in 1, except that another taxable Canadian corporation, Company X, owns all the shares of Company A which conducts a business in the U.S. Company A pays a dividend in 1986 of $1,000 and it is subject to U.S. tax at 10% or $100. Company X has total income for 1986 of $100,000 (including the $1,000 of dividend income from Company A).

You questioned whether or not Company X would be entitled to a foreign tax credit under subsection 126(1).

Opinion

In our opinion, Company X would be entitled to a foreign tax credit in respect of the dividend and the U.S. tax paid thereon, for the same reasons that Mr. A would be in the first scenario.

3(b) Alternatively, if Company X is unable to claim a tax credit under section 126 because it has insufficient income, you questioned whether or not it would be entitled to a deduction from income under subsection 20(12) in respect of the tax paid to the U.S.

Opinion

In our opinion, Company X would be entitled to a deduction under subsection 20(12) in respect of the U.S. tax paid for the same reason given in the second scenario.

We hope that these comments will be of assistance.

Sincerely,

for Director Corporate Rulings Division

Corporate Rulings Directorate