10 March 1988 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.

March 10, 1988

Mr. Keith Harding Revenue Canada Taxation Specialty Rulings, Foreign Section 88 Metcalfe Street, 3rd Floor Ottawa, Ontario

Dear Mr. Harding:

Re: Foreign non-business-income tax credit on U.S. source pension income

Further to our recent conversations, we are writing to you regarding the calculation of the foreign non-business-income tax credit in the following hypothetical situation:

1. A taxpayer is a U.S. citizen residing in Canada.

2. The taxpayer is in receipt of pension income (non-social security) from the U.S. government.

3. The U.S. average rate of tax on the pension income is in excess of 15% (assume 30%).

In our view, a taxpayer in these circumstances is entitled to a Canadian foreign non-business-income tax credit in excess of 15% of his gross U.S. source pension income.

All references herein to Articles are to provisions of the 1980 Canada-U.S. Income Tax Convention ("the Treaty"). All other statutory references are to the Income Tax Act - Canada ("the Act").

Reasons

1. Pension income (other than social security benefits) arising in the United States and paid to a resident of Canada is generally limited to 15% tax in the United States pursuant to Article XVIII, subparagraph 2(a).

2. However, paragraph 2 of Article XVIII is not applicable in respect of a U.S. citizen resident in Canada by virtue of the saving clause in Article XXIX, paragraph 2, as no exception is provided in paragraph 3. Accordingly, the United States is not restricted to a limit of a 15% tax on pension payments arising in the United States and paid to a U.S. citizen resident in Canada.

3. The full amount of income tax imposed by the United States on pension income arising in the United States and paid to a U.S. citizen resident in Canada is included as the taxpayer's "non-business income tax" pursuant to paragraph 126(7)(c). No portion is excluded pursuant to subparagraph 126(7)(c)(ii) by virtue of deductibility pursuant to subsection 20(11). Subsection 20(11) is only applicable to income from property (other than real property) that is income from a source outside Canada. Pension income is not income from property under subdivision b but, rather, is another source of income under subdivision d, pursuant to subparagraph 56(1)(a)(i).

4. A Canadian resident taxpayer is only limited in claiming a non-business foreign tax credit pursuant to subsection 126(1) by reference to the lesser of his non-business income tax and his Canadian tax otherwise payable as computed pursuant to paragraph 126(1)(b). No other limitation is imposed in claiming this credit under the Act by reference to citizenship or any other factor.

5. As a U.S. citizen resident in Canada is not restricted from claiming full non-business income foreign tax credit in Canada in respect of U.S. source pension income, no relief is required pursuant to Article XXIV. In particular, subparagraph 4(a) of Article XXIV only provides Canada's agreement to allow this credit which is already the affected taxpayer's right under Canadian domestic law. While subparagraph 4(a) does state that Canada need not provide a credit in excess of the amount of tax that would be paid to the United States if the resident were not a U.S. citizen, this has no effect in the circumstances. While Canada need not provide such credit, such credit is, in fact, provided under Canadian domestic law and could only be limited by specific amendment of that law. The purpose of Article XXIV is to deal with particular cases of double taxation which arise as a result of anomalous provisions in each of the two jurisdictions. In the circumstances in question, no such anomaly arises, no double tax is exigible and no relief under the Treaty is required or provided for.