Section 126

Subsection 126(1) - Foreign tax deduction

Cases

Interprovincial Pipe Line Company v. Minister of National Revenue, 68 DTC 5093, [1968] CTC 156, [1968] S.C.R. 498

s. 4(3) requires netting of interest expense

On similar facts to those in the Interprovincial case, infra, it was found that the taxpayer was required to net its interest expense against the interest receivable by it from its U.S. subsidiary for purposes of computing its foreign tax credit in light of the enactment of s. 139(1b) by S.C. 1960, c. 43 (now s. 4(3)).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(3) 59

Interprovincial Pipe Lane Co. v. Minister of National Revenue, 59 DTC 1229, [1959] CTC 339, [1959] S.C.R. 763, [1959] CTC 338

corporate-level borrowing did not relate to investment in sub

S.38(1) of the 1948 Act, which accorded a foreign tax credit for "tax paid by [the taxpayer] to the government of a country other than Canada on his income from sources therein for the year" applied to income before the deduction of interest expense under s. 11(1)(c) of the 1948 Act (now s. 20(1)(c)). Accordingly, the taxpayer, which was subject to U.S. withholding tax on interest income which it earned on loans made to its U.S. subsidiary was able to deduct a credit under s. 38(1) notwithstanding that the loans which it had made to the U.S. subsidiary had been funded out of borrowings made by it, giving rise to an interest expense which effectively off-set the interest income earned by it from its U.S. subsidiary. Judson J. stated (p. 1231):

"The appellant's borrowings and the interest paid thereon were related to the business as a whole and no part of the borrowings and the interest paid thereon can be segregated and attributed to the investment in the subsidiary ... The deduction against income given by s. 11(1)(c) is attributable to all sources of income and there is no authority to break it up and relate various parts of the deduction to various sources."

See Also

Marin v. The Queen, 2022 TCC 49

FTC domestic and Treaty provisions are applied re the particular year in which the subject income was earned

France started imposing income tax on rental income as it was earned rather than the tax being payable one year in arrears, as previously. However, the taxpayer (a Canadian resident with a French rental property), like others, was granted transitional relief so that in 2019 he received a tax credit from the French government equal to the French tax otherwise payable by him on his 2018 income – so that in 2019 he only had to pay the current tax on his 2019 rental income.

He nonetheless argued in Tax Court that he should be entitled to a foreign tax credit (“FTC”) for French income tax on the rental income for his 2018 taxation year (which clearly was subject to Canadian income tax) on the grounds that he was continuing throughout to pay French income tax on an annual basis.

In response, Lafleur J confirmed that the reference in s. 126(1) to an FTC for non-business income tax paid “for the year” refers to the taxation year (2018) in which the income was earned giving rise to the Canadian tax for which the FTC is claimed (he paid no net French tax for 2018): no FTC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax taxes for which FTC accorded must be imposed on the income which generates the Canadian taxes from which the credit is claimed 451
Tax Topics - Treaties - Income Tax Conventions - Article 6 may-be-taxed language does not confer an exclusive right to tax 195
Tax Topics - Treaties - Income Tax Conventions - Article 24 Art. 23 of French Treaty inapplicable where income of a particular taxation year was not otherwise taxed twice 246

Burton v Commissioner of Taxation, [2018] FCA 1857, aff'd [2019] FCAFC 141

a foreign tax credit was reduced by ½ when only ½ of a capital gain was brought into income

The taxpayer was an Australian resident who was taxed at the 15% long-term U.S. capital gains rate on his gains on disposal of U.S. oil and gas drilling rights. For Australian purposes a 50% discount was applied to the capital gain before imposing tax at a rate of around 45% on it.

The Australian foreign tax credit (FITO) provision (s. 770-10) provided:

An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

In confirming the Commissioner’s denial of a FITO for (leaving aside the effect of complicating adjustments) half of the U.S. tax, and after stating (at para. 95) that "that ‘included’ is a word that in different contexts may receive different applications," McKerracher J stated (at para. 109) his agreement with the Commissioner’s position (summarized at para. 4) that “double taxation occurs where a person pays both foreign tax and Australian tax on the same amount” and “an amount not included in assessable income (namely, 50% of the capital gain) cannot, by definition, be doubly taxed,” and added (at para. 114) that “the words ‘in respect of an amount’ mean an amount which is itself assessable.”

Words and Phrases
in respect of included
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 foreign tax credit was not required to be accorded to all the US tax on the gain 361

Ardmore Construction Ltd v Revenue and Customs, [2018] EWCA Civ 1438

under a practical and multifactorial approach, the source of interest was in the country of residence of the debtor

The taxpayer (“Ardmore”) was a UK resident company whose assets and activities were almost entirely in the UK. Using working capital, it subscribed for shares in two companies incorporated in the British Virgin Islands ("BVI") and owned by Gibraltar trusts established by the two brothers who owned Ardmore. A sum equal to the share subscription amount was lent by those companies to the trusts and by the trusts to Ardmore, in the latter case under a facility letter dated June 2005. The loan was not required not to be supported by any UK security, and the facility letter and loan documentation were governed by the law of Gibraltar and the parties submitted to the exclusive jurisdiction of the Gibraltar courts. HMRC determined that the interest paid on the loan was paid from a source within the UK and that Ardmore ought to have deducted tax from it.

Ardmore accepted “that under the source principle the test is multifactorial” (para. 15) but it maintained that in this case the source was in the creditor's place of residence to which greater weight should have been given.

In affirming the finding below that the source of the interest was in the U.K., Arden LJ stated (at paras. 42-43):

[T]he conclusion of the Upper Tribunal that the residence of the creditor should carry little weight cannot be criticised. The immediate search is for the source of the interest rather than a search indirectly for the source of the loan. The funds paid over as interest derived from funds generated in the UK. The activity of lending became passive once the loan was made, whereas the business of Ardmore was actively conducted to produce those funds. There was no default and the Gibraltarian exclusive jurisdiction and governing law clauses would only matter if there was default. …

Moreover, the Tribunals looked to the substantive matters rather than theoretical factors, such as causative link and governing law, and so applied a practical approach.

Arsove v. The Queen, 2016 TCC 283 (Informal Procedure)

no credit for U.S. taxes which should have been imposed but were not

The taxpayer, a US citizen resident in Canada, received a distribution from her IRA distribution of U.S.$5,617.78 on which U.S. tax of 10% was withheld. Having regard to Art. XXIV of the Canada-U.S. Treaty (para. 14):

[W]hen a U.S. citizen who is also resident in Canada earns pension income the source of which is in the United States, under the treaty the United States is allowed to tax the first 15% of that income, and the excess is taxable in Canada. This is why, to avoid double taxation, a taxpayer is allowed, in computing the Canadian tax, to claim a foreign tax credit for the 15% tax paid in the United States, and that taxpayer is entitled to a foreign tax credit against his U.S. tax for the tax paid in Canada over and above 15%.

On this basis, the taxpayer should have been subject to U.S. income tax of 15% of the distribution. Instead she incorrectly filed her U.S. return on the basis that the total amount of the distribution was deemed under Art. XXIV, para. 6 to be sourced in Canada, so that she claimed a full U.S. foreign tax credit in respect of this income, thereby claiming a full refund of the tax that had been withheld - and so that she not end up paying any U.S. tax on the distribution, given that the IRS accepted the return as filed.

Nonetheless, in filing her Canadian tax return, the taxpayer claimed a foreign tax credit under s. 126(1) equal to the 15% tax which the IRS should have imposed on the distribution. In rejecting the taxpayer's argument (at para. 17) that "the amount of tax paid is the amount of tax thati is calculated prior to the deduction of the foreign tax credit," and in denying the s. 126(1) claim, Lamarre A.C.J. stated (at paras. 19-21):

[T[here was no tax or levy ultimately imposed upon the appellant by the U.S. government after the deduction of the [U.S.] foreign tax credit. ...

[T]he purpose of the foreign tax credit is to prevent double taxation.

Here, since no taxes were paid, nor did any accrue,…the treaty does not come into play as no double taxation has occurred.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 application of Art. 24 of Canada-U.S. Treaty to IRA distribution to U.S. citizen 214

White v. The Queen, 2003 DTC 1170, 2003 TCC 668 (Informal Procedure)

The individual taxpayer was not entitled to a foreign tax credit for Australian income taxes paid by Australian companies that had paid him a dividend given that it was not he, but the Australian corporations, that had paid the tax.

Shere v. MNR, 89 DTC 201 (TCC)

The territorial source of the employment income of an employee of the New York office of a Canadian crown corporation whose salary was deposited in Canadian funds to a Montreal bank account, was the United States.

Curtis Brown, Ltd. v. Jarvis (1929), 14 TC 744 (K.B.D.)

The appellant, which carried on business in the U.K. as a literary agent, arranged for the publication by U.K. publishers in the United Kingdom and, in some instances, other commonwealth countries, of books which had been written outside the United Kingdom by non-resident clients. Rowlatt J. affirmed a finding that the appellant was liable for a failure to deduct income tax on royalties which it had collected from the publishers and paid to the clients on the basis that such royalties represented annual receipts from property situate in the United Kingdom, namely, the copyright. He also did not demur from a finding of the Commissioners that the clients did not exercise a trade in the United Kingdom.

Administrative Policy

20 June 2023 STEP Roundtable Q. 18, 2023-0966631C6 - Foreign Tax Credit Verification and Delays

CRA will accept alternatives to a foreign notice of assessment to evidence the foreign tax liability for foreign tax credit purposes

11 April 2023 Internal T.I. 2023-0964101I7 - Tax issues for cross-border employees

employment income does not arise in the U.S. for Treaty purposes to the extent the duties are performed in a Canadian home office

A portion of the employment duties of a cross-border employee (with a hybrid work arrangement) was exercised from Canada in the year but the individual made contributions under the U.S. Federal Insurance Contributions Act (“FICA contributions”). In finding that the FICA contributions made in respect of the duties exercised in Canada would not be eligible for a foreign tax credit, the Directorate referenced the rule in Art. XXI:2(a) requiring that the tax be paid on income “arising” in the U.S. and indicated that generally it would regard only that proportion of the employment income that corresponded to the days in which the employee was performing duties of employment while “physically present” in the U.S. as compared to the days of physical presence in both jurisdictions while performing those duties, would satisfy this “arising” test.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 FICA contributions of a cross-border employee are deductible only re employment income from duties physically performed in the US 243
Tax Topics - Treaties - Income Tax Conventions - Article 8 contributions to 401(k) plan not deductible to the extent the duties of employment were performed from a Canadian home office 151

20 January 2021 Internal T.I. 2019-0832211I7 - Cross-border Restricted Share Units

source of RSU benefit for FTC purposes determined based on an OECD-inspired hybrid methodology approach

In providing general guidance on the allocation of RSU benefits between Canada and a foreign jurisdiction, the Directorate noted that, in dealing with the similar question of allocating cross-border stock options, the OECD Commentary set indicated that generally stock option benefits should not relate to the period of employment after the vesting period and appeared to adopt the rebuttable presumption that an employee stock option benefit pertains to services rendered after the date on which the option was granted, and then stated:

The following methodology generally applies [after 2020] in sourcing RSU Benefits between Canada and foreign jurisdictions (the “Hybrid Methodology”):

i. Separate the “in the money” portion of RSU Benefits at the date of grant (the “ITM Portion”) and the portion of RSU Benefits relating to the increase in fair market value of the underlying shares from date of grant to date of vesting (the “FMV Portion”).

ii. The ITM Portion at the date of grant generally pertains to past services, and is sourced to the jurisdiction in which the employment services were rendered in the year in which the RSUs were granted (if multiple jurisdictions, in proportion to the employment period exercised in each jurisdiction in that year).

iii. The FMV Portion generally pertains to services rendered during the vesting period, and is sourced according to the OECD Guidance (that is, in proportion to the employment period exercised in each jurisdiction from date of grant to date of vesting).

The Directorate further indicated that this methodology applies regardless of where the employee was resident at the time of grant or during the vesting period, whether the RSUs at one time or over a period, whether they are settled in cash or with shares, and whether they are subject to s. 7.

For example, an employee, who was resident and exercised his employment in a foreign country (“FC”) up until December 31, 2021 and thereafter was resident in and exercised his employment in Canada, was granted 300 RSUs (to be settled in employer shares) on December 31, 2020, when his employer’s shares were trading at $10. The RSUs vest 1/3 each on December 31st of 2021, 2022, and 2023.

Focusing, for instance, on December 31, 2023, when he receives 100 shares with an FMV of $34 each, the ITM Portion for those shares, of $1,000, is sourced to FC (where his services were performed before the grant date); and the FMV Portion, of $2,400, is sourced 1/3 to FC and 2/3 to Canada in proportion to the period of employment exercised by him in each jurisdiction during the vesting period.

The individual recognizes an employment benefit of $3,400 in 2023 under s. 7(1)(a) (assume no Treaty). However, he is entitled to claim a foreign tax credit under s. 126(1) for any income tax paid to FC on the portion of the employment benefit that is sourced to FC (i.e., $1,800 = $1,000 + $800).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(i) OECD-inspired hybrid methodology for apportioning the source of RSU benefits between countries 396

26 May 2009 External T.I. 2009-0316841E5 F - Convention de retraite, crédit d'impôt étranger

no foreign tax credit can be claimed for non-business income tax paid on income of RCA trust

Before indicating that foreign tax paid on non-business income may be deductible under s. 20(11) or (12) in computing income for purposes of the Part XI.3 tax on retirement compensation arrangements, CRA stated:

Pursuant to paragraph 149(1)(q.1), no Part I tax is payable on the taxable income of an RCA trust. Consequently, such a trust cannot claim a deduction for tax paid for the year to the government of a foreign country pursuant to subsection 126(1) since this deduction can only be applied against Part I tax payable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 207.5 - Subsection 207.5(1) - Refundable Tax - Paragraph (b) usual Pt. I deductions, including under ss. 20(11) and (12), can apply to computing income under para. (b) 119

26 November 2020 STEP Roundtable Q. 4, 2020-0838001C6 - Foreign Tax Credit

UK source of gain re-sourced to Australia for s. 126 purposes under Australia-Canada Treaty sourcing rule

A Canadian-resident individual is subject to Australian gains tax on the gain from selling the shares of a U.K. holding company holding an Australian real estate corporation. Under the Canadian domestic situs rules, the gain would have a U.K. source so that there would be no Canadian foreign tax credit for the Australian tax – but this is remedied by Art. 22(2) of the Canada-Australia Treaty (broadly similar, for example, to Art. 24(3) and 21(3) of the U.S. and U.K Treaties, respectively), which provides that income or gains of a Canadian resident which are taxed in Australia in accordance with Art. 13 of the Treaty are relevantly deemed to be sourced in Australia.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 a capital gain’s geographic source for Canadian FTC purposes was re-sourced to Australia under the Treaty-source rule 288

3 December 2019 CTF Roundtable Q. 2, 2019-0824381C6 - Foreign taxes paid

taxpayers can translate under s. 126 foreign taxes at the exchange rate applied to the related income

Respecting the s. 126 credit for foreign taxes paid in the relevant taxation year, where the foreign tax is paid at a different time than the income arose, can the taxpayer translate at the foreign exchange rate(s) applicable:

  • On the date(s) on which the foreign income was earned or received?
  • On the date(s) on which the foreign taxes were paid?
  • On either date?

CRA responded that the foreign tax credit rules in s. 126 require that the tax actually be paid. CRA considers the date of payment of the foreign tax to be the relevant date for the purpose of section 126 – and, therefore, the date that the amount arose for the purpose of s. 261(2)(b).

Respecting the provision in s. 261(2)(b) for the use of another conversion rate that is acceptable to CRA, CRA will accept the use of the same relevant spot rate that was used for the conversion for the foreign income itself. Either method is acceptable as long as it is used consistently from one year to another.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 US and UK Treaties do not eliminate FTC requirement that the taxes be paid 251
Tax Topics - Income Tax Act - Section 261 - Subsection 261(2) - Paragraph 261(2)(b) translation of foreign taxes at same FX rate as that used for related income is acceptable 86

5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 12, 2018-0761581C6 F - Foreign Tax Credits related to mutual funds

CRA is no longer requesting country-by-country breakdowns of income derived from mutual funds in its FTC audits

In the autumn of 2017, CRA requested numerous taxpayers to provide information respecting their foreign tax credit claims including as to the allocation of their income from Canadian mutual funds as between the U.S., Europe and Asia. This information was not available on the T3s issued by such mutual funds. In response to a query on this, CRA stated:

The CRA noted an increasing number of returns in which the claimed federal foreign tax credit amounts were inconsistent with the amounts of foreign non-business income tax paid as reported on the information slips on file (for example, box 34 of the T3 slip). …

In response to the expressed concern where a mutual fund is invested in a significant number of countries and the burden of allocating the respective information may be burdensome to the taxpayer, the CRA will revise its administrative position and request taxpayers to provide an amended tax slip that correctly reflects the federal foreign tax credit amounts claimed. In general, the CRA will no longer systematically require a breakdown of foreign income by country, type of income and foreign taxes paid by country in such situations.

29 May 2018 STEP Roundtable Q. 13, 2018-0744161C6 - 75(2) and Foreign Tax Credit

U.S.-dividend income attributed under s. 75(2) does not generate FTCs for the related withholding tax

An individual (the "Settlor") creates an alter ego trust and transferred inter alia U.S. stocks to the trust. S. 75(2) applies to deem the dividend income thereon to be income of the Settlor, who created the trust and who is, under the trust, a lifetime beneficiary. Is it correct that the U.S. withholding tax on the dividends would not be attributed to the Settlor, and remains in the trust?

CRA indicated that s. 75(2) does not attribute a foreign non-business income tax payment back to the settlor. Since the amount must have been paid by the taxpayer who is making the claim in order to claim a foreign tax credit under s. 126(1), the settlor would not be eligible to claim a foreign tax credit respecting to the U.S. tax paid in the alter ego trust and, for the same reason, the settlor would not be able to claim ss. 20(11) or (12) deduction.

However, the trust itself may be able to claim a s. 20(11) or (12) deduction in calculating the income that is attributed to the settlor.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) US withholding taxes borne by s. 75(2) trust might reduce the attributed income amount 94

29 May 2018 STEP Roundtable Q. 12, 2018-0748811C6 - US Transition Tax

generally Canadian residents who are subject to the U.S. transitional tax generally will not be entitled to a foreign tax credit

A U.S. citizen resident in Canada holds a controlling interest in a U.K. company. The U.S. imposes its one time transition tax on the "earnings and profits" of the U.K. company held at certain dates in 2017. Would Canada view such U.S. transition tax as an "income or profits tax" under s. 126(7) of the Act when applying the foreign tax credit ("FTC") rules?

After noting that U.S. Subpart F income resembles FAPI under the ITA and that the U.S. tax paid by the individual on the individual’s share of the U.S. Subpart F income would qualify as an income tax for the purposes of the Canadian foreign tax credit rules, the difficulty in the example was that it was not clear if any income is sourced to the U.S., given that U.S. Subpart F income is not deemed to be income under Canadian domestic law, so that the relevant component in the formula would be zero, and a foreign tax credit would not be available.

Furthermore, as the transition tax would be paid for 2017, a foreign tax credit would not be available in any other year, even if the tax burden were to be borne in annual instalments.

29 January 2018 External T.I. 2017-0682301E5 - Deemed Distribution and Withdrawal from IRA

deemed Code taxability of IRA on renouncing U.S. citizenship generally would generate an FTC to deemed Cdn-resident recipient

Where a U.S. long-term resident relinquishes her green card (or a U.S. citizen renounced citizenship) after having become a Canadian resident, there would be a deemed taxable distribution to her of the amount in her IRA for Code purposes – which by virtue of ss. 56(1)(a)(i)(C.1) and 56(12) would be deemed to be included in her income at that time for ITA purposes as well. CRA stated:

The U.S. tax paid by the Taxpayer on the Deemed Distribution would qualify as “non-business-income tax” within the meaning of subsection 126(7). Therefore the U.S. tax paid would factor into the computation of a foreign tax credit under subsection 126(1), provided all the conditions of that subsection were otherwise satisfied. …

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) - Clause 56(1)(a)(i)(C.1) the deemed U.S. income inclusion from an IRA on renouncing U.S. citizenship or relinquishing a green card also is recognized for ITA purposes 365
Tax Topics - Income Tax Act - Section 56 - Subsection 56(12) deemed ITA inclusion on deemed distribution from IRA on renouncing U.S. citizenship or relinquishing green card 78

8 September 2017 External T.I. 2014-0558601E5 - Amount of foreign withholding tax paid by partner

requirements for a partner to claim, for FTC purposes, a disproportionate share of withholding tax borne by the partnership

Mr. A and Mr. B each have a 50% interest in AB Partnership, and are resident in Country X and Canada, respectively. On payment of a $1,000 dividend on a 20% shareholding of AB Partnership in Xco (resident in Country X), Xco, as required, withholds $25, calculated as 5% of the $500 portion of the dividend beneficially owned by Mr. B. Is Mr. B entitled to include the $25 as non-business income tax paid in respect of Country X in the calculation of his foreign tax credit (rather than only a pro-rata portion thereof, or $12.50)? After noting that Folio S5-F2-C1, para. 1.39 would generally require a pro-rata (50-50) allocation of the withholding tax between the partners, CRA stated:

[T]o the extent that Mr. B would be able to provide sufficient, clear, and unambiguous evidence with his tax return that the $25 of foreign tax paid by … AB Partnership was computed by reference to his treaty status with Country X and that Mr. A was not claiming any amount of the $25 as a foreign tax credit against any Canadian income tax otherwise payable, in our view, it would be reasonable to conclude that Mr. B’s share of the foreign tax paid by AB Partnership was $25.

In addition to the evidence of payment of the foreign tax discussed in Folio S5-F2-C1, the partner making such a non-pro rata claim should provide the name, Canadian tax ID number (if any), country of residence, nature and amount of the partnership interest, calculated income allocation and allocated foreign withholding tax amount of each partner – together with evidence demonstrating that the withholding was computed by reference to each partner’s treaty status.

13 June 2017 STEP Roundtable Q. 4, 2017-0695141C6 - U.S. grantor trust

dual-resident individual who is subject to direct U.S. tax on income from a s. 94(3) trust can generate a FTC if the trust income is annually distributed or he elects under s. 94(16)

Mr. C, who is a Canadian resident and U.S. citizen, settled a revocable living trust for him and his family which, as a “grantor trust”, is disregarded for Code purposes, so that for Code purposes all trust income is that of Mr. C. However as Mr. C is a “resident contributor” to the trust, the trust is subject by virtue of s. 94(3) to Canadian income taxation on its worldwide income. Since the Code taxes are not payable by the trust, it cannot claim a foreign tax credit or an s. 20(12) deduction. Could this mismatch be remedied by making all its income payable to Mr. C in each year and making an s. 104(22) designation so that the income retains its character as U.S. source income in his hands – or could he elect under s. 94(16) so that the trust’s income will be attributed to him?

CRA noted that s. 94(3)(a) does not deem the trust (assumed to be resident in the U.S.) to be resident in Canada for purposes of s. 108(5), s. 108(5) does not impact the territorial source of the income, and that an amount included in Mr. C’s income pursuant to s.104(13) would be considered to be US-source income. Accordingly, as Mr. C paid the U.S. tax, he may claim the foreign tax credit in respect of the tax paid, subject to the s. 126(1) conditions. Thus, an s. 104(22) designation is not needed in this case in order to be eligible for a foreign tax credit.

CRA also noted that s. 108(5) applies to deem any amount included in Mr. C’s income under s. 104(13) to be his income from a property that is an interest in a trust and that an amount included in his income under s.104(13) would be U.S.-source income, and indicated that a deduction may be claimed under s. 20(12) in respect of US income tax paid by Mr. C in respect of the trust income that was paid or made payable to him by the US grantor trust in the year (with any such claim reducing the amount of non-business income tax paid by him for s. 126 purposes).

As Mr. C is the only contributor, he would report under s. 94(16)(a) 100% of the income earned by the trust. S. 94(16)(c) would deem such income to have a U.S. source for purposes of s. 126 and paras. (c) and (d). Thus, Mr. C can claim the foreign tax credit under s. 126(1), in respect of the foreign income that the trust designates under s. 94(16)(c). As para. (c) does not apply for purposes other than those specified, pursuant to s. 94(16)(b) Mr. C’s income under s. 94(16)(a) remains sourced to Canada for the purposes of s. 20(11), so that he canot cannot claim a deduction under s. 20(11).

Finally, Mr. C may claim a deduction under s. 20(12) in respect of the US income tax he paid in respect of the income attributed to him under s. 94(16)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(16) election of US-citizen/Cdn-resident beneficiary of grantor trust so as to generate FTC 254
Tax Topics - Income Tax Act - Section 108 - Subsection 108(5) - Paragraph 108(5)(a) income from factually U.S.-resident but s. 94(3) trust was U.S.-sourced 114

13 April 2017 External T.I. 2015-0601781E5 - U.S. tax paid in respect of an LLC's income

Post-Anson, no credit for U.S. taxes paid by a Canadian member on undistributed LLC income

A Canadian-resident individual who is a member of a U.S. LLC pays tax in the U.S. on his or her share of profit of the LLC for a particular taxation year but, unless Anson applies, does not have U.S. source income in that taxation year for s. 126(1) purposes (so that there is no s. 126 credit in that year - nor in a subsequent year, given that s. 126(1) of the Act does not permit the foreign taxes paid for a particular taxation year to be carried forward to a subsequent taxation year when profits are distributed by the LLC). Is the member’s income from the LLC considered to arise as it is earned by the LLC rather than only once it is distributed by the LLC to its members? CRA responded:

We are maintaining our position that LLCs would generally be considered to be corporations for the purposes of the Act, based on the application of our usual two-step approach. Consequently, for the purposes of the Act, any profits earned by an LLC generally belong to the LLC as a separate legal entity until they are distributed to the members.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 Canada's denial of foreign tax credits re undistributed LLC income is consistent with Art. 24 of Canada-US Treaty 365

12 July 2016 External T.I. 2014-0560361E5 - Cdn beneficiary of US living trust

whether there is a foreign tax credit for US tax paid by the grantor of a revocable US living trust

In the course of a general discussion of the Canadian tax treatment of a taxpayer holding an interest in a U.S. “living trust,” CRA stated:

A U.S. revocable living trust is a trust that is usually controlled by and established for the benefit of those who created the trust (“grantors”) during their lifetime. … Where the grantor can change the terms of, or completely revoke the trust during their lifetime, they effectively retain control of the trust assets. Given this retention of control, it is our understanding that…any income generated by the trust would be reported by the grantors of the trust on a personal U.S. income tax return. …

Where U.S. tax is paid on trust income by the grantors, a foreign tax credit may be available to the grantor/beneficiary in Canada. The available credit would depend on whether amounts are considered to be paid or payable from the trust for Canadian tax purposes and whether the timing of the income inclusion by the beneficiary coincides with the payment of tax in the U.S. If income that is not otherwise subject to the application of subsection 75(2) is not distributed out to the grantor/beneficiary in the same year in which it is generated, the trust will pay Canadian taxes on the income, but will not be able to offset these taxes with foreign income tax credits since they are based on the taxes paid personally in the U.S. by the grantors.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 104 - Subsection 104(1) question of fact whether a U.S. revocable living trust is an excluded trust 134
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) potential application to U.S. revocable living trust 190

8 December 2016 Internal T.I. 2016-0634231I7 - Pension received from the European Union

EU withholding is ineligible for foreign tax credits

A Canadian taxpayer receives pension amounts from the EU as a result of employment there (while still a UK resident). The amount of the pension received is net of withholding tax and the taxpayer would like to claim the tax withheld as a foreign tax credit.

After referencing its position in 2013-0500491E5 that the EU is an international organization rather than a foreign government, CRA stated:

[T]he amounts withheld were paid to the EU and not to a government of a country other than Canada. Therefore, as stated above, the taxpayer would not be entitled to a foreign tax credit under subsection 126(1). Further, the taxpayer would not be entitled to foreign tax credit under subsection 126(3) because the income is pension income, not employment income.

Words and Phrases
government

29 November 2016 CTF Roundtable Q. 12, 2016-0669851C6 - Support for US FTC Claims

acceptable supporting documents for individuals reporting U.S. source income

This question and response is similar to 2016-0634941C6. The questions included: Where a taxpayer’s employment duties are performed in a large number of U.S. states and municipalities (e.g. professional athletes), it may be very laborious and cumbersome to obtain transcripts or official notices or statements from each of the states and municipalities. Would the CRA accept U.S. Form 1040-NR showing a deduction against the U.S. federal tax owed for state tax paid as satisfactory support for the amount of U.S. state tax claimed as foreign tax credit? CRA’s response included:

The Canadian FTC is dependent on a confirmed final tax liability with the foreign tax authority and the supporting documents requested are proof of that confirmed final tax liability.

Acceptable supporting documents for individuals reporting U.S. source income are as follows:

  • a completed Form T2209, Federal Foreign Tax Credits, for each country to which foreign taxes were paid;
  • federal, state, and municipal tax returns and all associated schedules and forms;
  • a federal account transcript;
  • an account statement or similar document from the state and municipal tax authority;
  • all information slips (W-2, 1042-S, 1099); and
  • any other document that may be needed to support the claim.

May 2016 Alberta CPA Roundtable, Q.10

taxpayers paying U.S. taxes through a Canadian trust or partnership are relieved from documenting support for their FTC claim (if T3 or T5013 issued)

In a similar exchange to that at 2016-0669851C6, CRA was also asked, “will taxpayers have any issues with FTCs that are reported on a Canadian information slip (i.e. T3, T5 or T5013)?” and responded:

Canadian information slips continue to be acceptable supporting documents for the FTC.

3 February 2016 External T.I. 2014-0548111E5 - U.S. tax paid in respect of an LLC's income

FTC for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain

Mr. A, Canadian resident and citizen subject to a Canadian marginal rate of tax of 50%, was a member of an LLC carrying on a U.S. active business and which was treated as a partnership for Code purposes. In each of 2013 and 2014, Mr. A paid U.S. individual income tax of $400 on his share of LLC’s income of $1,000, and did not receive any dividends from LLC or any other U.S. source. LLC (which was not a controlled foreign affiliate of Mr. A) made a pro rata distribution of all its property in 2014 on a liquidation and dissolution (“L&D”), including a distribution of $2500 to Mr. A, thereby giving rise to a $2,000 capital gain on his LLC shares. If the US tax paid by Mr. A is a “non-business income tax”, and the taxable capital gain is US-source income, would he be entitled to a foreign tax credit in 2014 under s. 126(1)?

CRA stated that “for purposes of subsection 126(1), a taxpayer’s income sourced in a particular foreign country for a particular year would include the taxpayer’s taxable capital gains for that year that are sourced in that country” and then stated:

[I]f Mr. A’s capital gain on the disposition of his LLC shares is a US source capital gain under… S5-F2-C1, subsection 126(1) could apply to allow Mr. A a foreign tax credit of up to $400 in 2014.

In indicting that the “source” rule in Art. XXIV, 3(b) of the Canada-U.S. Treaty would not preclude the taxable capital gain from being US-source income for purposes of s. 126(1), CRA stated:

[T]he provisions of an income tax treaty are generally not to be applied so as to result in more burdensome Canadian income tax being imposed on a taxpayer resident in Canada than the tax that would otherwise be imposed on the taxpayer under the Act (determined without reference to the treaty).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) - Paragraph 88(3)(d) no deemed dividend 133
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax LLC tax paid by Cdn member not re business 169
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) only income was taxable capital gains 136
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) s. 20(14) deduction for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 439
Tax Topics - Treaties - Income Tax Conventions - Article 24 Treaty sourcing rule does not trench on domestic FTC 215

2015 Ruling 2015-0572541R3 - Foreign Tax Credit on Transfer of 401(k) to RRSP

s. 60(j) deduction does not reduce foreign source income for FTC purposes

A Canadian-resident individual (the "Individual") who was not a US citizen contributed to a 401(k) plan while employed in the U.S. He will withdraw the amount in the plan in a lump sum and contribute an amount not exceeding this lump-sum to a newly-established RRSP within 60 days after the end of the year of the withdrawal. The lump-sum withdrawal will be include in his income under ITA 56(1)(a)(i) and will be subject to U.S. withholding taxes under Code s. 1441(a), and to an additional tax of 10% of its amount under Code s. 72.

After ruling that Individual will be entitled to a s. 60(j) deduction for the contribution to his RRSP and that the withholding taxes and additional 10% tax will constitute income or profits taxes paid by the Individual to the U.S. government,CRA ruled:

For the purposes of subparagraph 126(1)(b)(i)…, the amount to be included in "qualifying income" from the US, for purposes of calculating the foreign non-business tax credit, is the gross amount of the pension included in income under subparagraph 56(1)(a)(i)…without deducting the amount transferred under paragraph 60(j)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax additional 10% tax on withdrawal from 401(k) plan, as income tax 123
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j) 31

23 July 2015 External T.I. 2014-0546571E5 - Foreign Tax Credit

no FTC for dividend tax payable by company

Effective October 1, 2007, the "secondary tax on dividends" subjected dividends paid by a South African company to a non-resident to tax on the company at a rate of 10% thereof. Commencing April 1, 2012, the STC was replaced with a conventional withholding tax regime. CRA stated:

Since the STC is a tax levied on a South African company that paid the dividend, the requirement that the tax be paid by the taxpayer (i.e., the Canadian-resident recipient of the dividend) is not met. …[S]ince…the STC is not paid by the Taxpayer, the Taxpayer will not be able to claim a foreign tax credit… .

30 October 2014 External T.I. 2013-0500491E5 - Pension from XXXXXXXXXX

EU withholding does not qualify as state tax

Is tax withheld by the European Union on a pension received by a Canadian resident from an EU organization and which is exempt from national tax under a European Union Treaty, an income tax paid to the government of a country other than Canada for purposes of the foreign tax credit under s. 126(1)? CRA responded:

[T]he foreign tax credit provided by subsection 126(1) must be in respect of tax paid to a government of a country other than Canada. … The European Union is an international organization as defined in section 2 of the Foreign Missions and International Organization Act, and … would not be considered a government of a country other than Canada. Accordingly … subsection 126(1) is not available.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(i) EU Treaty does not engage s. 110(1)(f)(i) exemption 98
Tax Topics - Income Tax Act - Section 126 - Subsection 126(3) pension income not employment income 76

23 July 2014 Internal T.I. 2014-0525231I7 - Foreign tax credit

s. 40(3) gain had Cdn source/foreign tax not a "tax" if no refund sought

Canco received a dividend from a Japanese resident company foreign affiliate ("Forco"), which was subject to Japanese withholding tax and resulted in gain under s. 40(3). In the same taxation year, Canco distributed its Forco shares to its non-resident parent as a dividend-in-kind. Canco paid Japanese income tax on the capital gain reported on such disposition and also reported a capital gain for Canadian tax purposes – but later determined (with CRA's concurrence) that the fair market value of the shares had been nil. No Japanese tax refund was pursued and Canco instead claimed a foreign tax credit against the Canadian income tax payable on the taxable portion of the s. 40(3) gain.

Before concluding that "Canco would not be entitled to a FTC on one of the following bases: the payment to the Japanese tax authorities was voluntary and is not a "tax" within the meaning of subsection 126(1) or the subsection 40(3) deemed gain is not income from a source in Japan for the purposes of the definition of "qualifying income" in subsection 126(7)," the Directorate stated:

Given that the taxpayer chose not to advise the Japanese tax authorities of the revised valuation and did not attempt to obtain a refund of tax, the case law [e.g., Meyer] would lend support to the position that absent any evidence to the contrary the tax paid to the Japanese tax authorities was voluntary and as such, should not be considered to be a "tax" within the meaning of subsection 126(1).

… [A] taxable capital gain resulting from a deemed disposition of property is considered to be Canadian-source income, which therefore cannot be included in the foreign non-business income for purposes of claiming a FTC under subsection 126(1). This position is supported by the fact that from the foreign jurisdiction's perspective no taxable event occurs as a result of a deemed disposition in Canada and thus no conflict arises in respect of determining a territorial source of a deemed gain and which state ultimately has the right to tax such a gain.

…[T]he taxpayer attempted to apply the criteria established [in S5-F2-C1, para. 1.65 for actual dispositions]… and concluded that the gain from the deemed disposition should be sourced to Japan because…Forco's shares were located in Japan and the issuer's location, residence and place of business were in Japan. …[T]he criteria established for determining the place of the actual sale of shares cannot be applied in a meaningful way to a deemed disposition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax foreign tax not a "tax" if no refund sought 210
Tax Topics - Treaties - Income Tax Conventions - Article 24 s. 40(3) gain had Cdn source because not taxed in Japan 238

11 September 2014 External T.I. 2013-0495091E5 - Reimbursement of employee's foreign tax

non-creditable foreign income taxes levied on sources outside that country

Under the tax laws of Country A (a non-Treaty country), Canadian resident employees of a Canadian employer who are working there are considered by Country A to be resident there, so that they are required to remit income tax payments to Country A in respect of their worldwide income on a monthly basis. After indicating that reimbursements by the Canadian employer for such Country A taxes would be taxable benefits, CRA stated:

Even though an employee would be taxed on their worldwide income by both Canada and Country A, the availability of a Canadian FTC would only be available in respect of income from sources in Country A.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) taxable benefit from foreign tax reimbursement 157

10 June 2013 STEP Roundtable, 2013-0480311C6 - 2013 STEP CRA Roundtable - Question 5

The starting point in determining the amount of a foreign tax credit available to a part-year resident of Canada in respect of a particular foreign jurisdiction is the total "non-business-income tax" or "business-income tax" paid for the year to that foreign jurisdiction... . However, the actual amount of a foreign tax credit available to a part year resident is determined by the formulas contained in subsections 126(1) and (2.1)... .

28 May 2013 Internal T.I. 2013-0476381I7 - Deemed Resident Trusts & Foreign Tax Credit

no pro-ration of FTC by s. 94 trust where Canadian gain was smaller than US gain

A trust was settled in the U.S. with marketable securities having an adjusted cost base and fair market value of $100,000. The settlor moved to Canada and, following the 60-month period referred to in former s. 94(1)(b)(i)(A)(III), the ACB of the securities was stepped up to $180,000 under s. 128.1(1)(c) as a result of the trust being deemed to have become resident in Canada. The trust then disposed of the securities and realized capital gains of $100,000 and $20,000, and incurred gains tax of $10,000 and $2,900, for U.S. and Canadian purposes, respectively (but before taking into account any foreign tax credit in the case of the Canadian capital gains tax).

For purposes of determining the foreign non-business income tax credit of the trust, would the $10,000 of U.S. tax need to be pro-rated to reflect the $20,000 portion of the gain that is taxable in Canada (so that the credit would be reduced from $2,900 to $2,000)?

After noting that under s. 94(3)(b)(ii) there is no limiting wording similar to that in former s. 94(1)(c)(ii)(B) requiring that the foreign tax paid "can reasonably be regarded as having been paid in respect of that income" in order to qualify for the credit, CRA stated:

While Canada and the U.S. may have different rules for calculating the income from a particular source, the amount of foreign non-business income tax paid is not limited if the amount of income computed for Canadian tax purposes from that same source happens to be less. Accordingly… the foreign tax credit allowable pursuant to subsection 126(1) would be $2,900.

However, if s. 75(2) applied to attribute the gain of the trust to the beneficiary, no credit would be available to the beneficiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) no s. 20(12) deduction available where only a capital gain 154
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(b) 295

S5-F2-C1 - Foreign Tax Credit

1.39 The appropriate share of the foreign taxes paid by a partnership of which the taxpayer is a member is considered to be tax paid by the taxpayer. For the purposes of claiming a foreign tax credit, the amount of the foreign income must be calculated in accordance with section 96 and all other applicable provisions of the Act. The taxpayer's appropriate share of the foreign taxes paid is generally the same proportion of the total foreign taxes as the taxpayer's share of income is to the total income of the partnership. These amounts may not necessarily match the amounts calculated under the tax laws of the foreign jurisdiction.

Canadian legal principles are applied in determining whether foreign taxes were paid on an agency basis, so that taxes paid on this basis qualify as taxes paid by the Canadian taxpayer even though the agent is assessed in the foreign country on the basis that the relevant activities were for its own account (para. 1.40).

Sources generally are determined as follows:

  • interest/ dividends - the residence of the debtor/corporation (para. 1.58—1.59)
  • real property rentals – property location (para. 1.60)
  • rental of equipment etc. – country of use (para. 1.60)
  • royalties – country where the related right is exploited (para. 1.61)
  • capital gains from real estate – property location (para. 1.62)
  • capital gains from stocks/bonds – location of exchange (para. 1.65)
  • capital gains from other property – place of disposition/title transfer (para. 1.62)
  • capital gains from deemed dispositions – Canada (para. 1.63)

In the situation where the total allowable capital losses for all countries (including Canada) exceeds the amount of such losses that is deductible in computing the taxpayer's income under section 3, the taxpayer may allocate the losses amongst the countries in any manner provided that

  • the amount of allowable capital losses allocated to any particular foreign country does not exceed the allowable capital losses actually incurred in that country; and
  • the aggregate of the Canadian portion (if any) of the allowable capital losses and the various amounts allocated to the foreign countries is equal to the total amount of allowable capital losses that is deductible in calculating the taxpayer's income under section 3 of the Act (para. 1.92, including numerical example).

"Any tax in the nature of an income, gains, or profits tax that is paid for the year to a foreign jurisdiction in respect of a capital gain should be included in the non-business-income tax paid to that jurisdiction." respecting the taxable capital gains that are recognized for ITA purposes (para. 1.89).

13 August 2010 External T.I. 2010-0359571E5 F - Crédit d'impôt étranger

foreign withholding tax is borne by the copyright holder rather than the Cdn. selling agent

Corporation A, which produces television programs for which it holds the rights of exploitation, sells such programs through Corporation B (also a resident corporation) as sales agent for a percentage commission, with a French buyer withholding taxes at source and remitting the net amount to Corporation B. CRA stated:

[I]t will usually be accepted in such situations that the selling party is Corporation A since it is Corporation A which actually assigns the rights to exploit television programs to a third party. …

[I]t is the selling party, Corporation A, that paid non-business-income tax to the government of a country other than Canada for the purposes of paragraph 126(1)(a), which can, therefore, compute a foreign tax credit under subsection 126(1).

27 October 2005 External T.I. 2004-0103431E5 F - Crédit d'impôt étranger-Gain en capital

claiming of principal residence exemption or capital loss carryforwards would generally preclude FTC for related US capital gains tax

A Canadian resident, who owned a condominium in Florida for his personal use, disposed of the condominium at a gain that was taxed in the U.S., and utilized the personal residence exemption or, alternatively, capital loss carryforwards, to offset the gain. CRA stated:

[I]f the taxpayer's only qualifying income from a source in a country other than Canada is a capital gain and the capital gain is reduced to nil because of the provisions of paragraph 40(2)(b), no FTC can be claimed. On the other hand, if the taxpayer has sufficient non-business income from that particular country, a FTC may be claimed even though no tax under the Act arises from the income underlying the foreign tax (i.e., in this example, the capital gain was reduced to nil by paragraph 40(2)(b)).

… [I]f for a taxation year Mr. A decides to reduce the taxable capital gain to nil by claiming allowable capital losses, the tax consequences would be the same as those described in the previous paragraph for the purposes of the calculation under subsection 126(1).

29 August 2003 Internal T.I. 2003-0018497 F - L'Année d'imposition diffère

foreign tax paid for different foreign taxation year should be prorated based on the proportions of income earned in the Canadian taxation years
Also released under document number 2003-00184970.

Regarding the calculation of the foreign tax credit in respect of tax paid by a taxpayer with a calendar taxation year for ITA purpose to the Australian government where the taxation year determined under the (Australian) foreign tax law was different, CCRA stated that its:

position is to accept a pro-rata calculation of income and tax paid. The proportion of foreign income and foreign tax should be accounted for in proportion to the foreign income earned in the calendar year.

15 April 2003 External T.I. 2002-0139305 F - Immigration

FTC can be generated where recapture of depreciation, and denied capital loss, are realized on a US rental building
Also released under document number 2002-01393050.

CCRA indicated that where a taxpayer disposed of a ½ co-ownership interest in a US rental building whose ACB but not its capital cost had been stepped up under former s. 48(3), so that a capital loss was realized which was denied under s. 39(1)(b) and recapture of depreciation was realized, a foreign tax credit could be computed under s. 126(1) based on the amount of the recapture.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 128.1 - Subsection 128.1(1) - Paragraph 128.1(1)(c) ss. 128.1(1)(b) and (c), unlike former s. 48(3), apply also for CCA/recapture purposes 163
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) step-up of partnership interest on immigration to Canada neutralized the capital gain on partnership property when partnership wound up 146

20 February 2003 External T.I. 2002-014360

In response to a query as to whether U.S. income tax paid in excess of the proportionate Canadian income tax rate on U.S. non-investment income may be utilized against U.S. source investment income, CCRA noted that the limit under s. 126(1)(b)(i) is computed on the basis of one basket per country and that "therefore, it is permissible, other circumstances allowing, for 'excess' foreign tax paid on the U.S. non-investment income to be used against U.S. source investment income in calculating a taxpayer's foreign tax credit".

Amounts deducted under s. 20(12) will reduce both the taxpayer's total non-business income taxes paid and the taxpayer's non-business income from the particular country for foreign tax credit purposes.

Where the foreign jurisdiction (e.g., the U.K.) computes taxes other than on a calendar-year basis, CCRA will accept an apportionment of foreign income and foreign taxes based on the portion of income earned during the calendar year.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 39

5 April 2001 External T.I. 2000-0043615 - Taxation of Shareholder of US S-Corp

Unless an agreement with the Canadian competent authority is obtained pursuant to Article XXIX(5) of the Canada-U.S. Income Tax Convention, the Canadian-resident shareholder of an S-Corp will not obtain a Canadian foreign tax credit for the U.S. tax paid by him in respect of the income of the S-Corp unless he had income from other sources of the United States that was subject to Canadian income tax.

14 December 2000 External T.I. 2000-0029575 - section 126 of the Act

A Canadian resident corporation ("Xco") with a November 30, 2000 taxation year end is a member of a partnership that has a March 31, 2000 taxation year end for Canadian income tax purposes and a December 31, 2000 year end for U.S. income tax purposes and that disposes of a U.S. office building at a capital gain in July 2000. As the term "for the year" relates to the year for which the foreign income tax is exigible (i.e., liable to be paid) - in this instance, the year 2000 - rather than to the year in which the foreign tax is actually paid, in this situation the income tax paid to the U.S. by Xco for the year in which the capital gain arose (2000) would not be considered to be paid for the year the capital gain is reported in Canada (2001). However, based on the administrative position described in the 1989 Canadian Tax Foundation Round Table, Q. 4, where the taxpayer's Canadian and foreign taxation years do not coincide a portion of the foreign taxes may be prorated. In this example, Xco would be able to allocate 1/12 of the year 2000 U.S. income taxes (along with 11/12 of its 2001 U.S. taxes paid) as foreign taxes paid for its November 30, 2001 taxation year.

8 September 1998 External T.I. 9820085 - ARGENTINA TAX ON RENTAL OF SOFTWARE

Where under RC's interpretation of the Canada-Argentina Treaty, the rate of Argentinean tax payable on software rental payments received by a Canadian licensor was limited to 10%, and any amount of Argentinean tax paid in excess of the 10% limitation would not qualify as non-business-income tax under s. 126.

26 January 1996 External T.I. 9516185 - MEANING OF "FOR THE YEAR" IN SECTION 126

Respecting a situation where a Canadian resident who also was a U.S. resident is required for Canadian purposes to report income in respect of a U.S. phantom stock plan in the year of redemption of the units but does not recognize income for U.S. purposes until two years later, income tax paid to the U.S. for the subsequent year will not be considered to be paid for the year of redemption in which the income is reported for Canadian purposes. The term "for the year" relates "to the year for which the foreign income or profit tax is exigible (i.e., liable to be paid)".

21 April 1995 External T.I. 9422935 - FOREIGN TAX CREDIT (HAA 7988-1)

The Canadian beneficiary of a non-discretionary U.K. trust or (by virtue of a U.K. extra-statutory concession) the Canadian beneficiary of a U.K. discretionary trust is granted "look-through" treatment by the U.K. tax authorities. Accordingly, such a beneficiary is entitled to a foreign tax credit.

14 December 1994 External T.I. 9430525 - FOREIGN TAX CREDIT

The adjusted net income used in computing a foreign tax credit under s. 126(1) or (2) is not reduced by the deduction under s. 110(1)(k).

1 September 1994 Internal T.I. 9331436 - MEANING OF PROPORTION IN 126(1)(B)

Although the word "proportion" can include a fraction that is greater than 1 (see Quemont Mining Corp. Ltd. v. MNR, 66 DTC 5376 (Ex Ct), at 5386), the French version of s.126(1)(b) clarifies that the proportion referred to in s.126(1)(b)) and s.126(2.1)(a)) cannot exceed 1 with the result that the foreign tax credit cannot exceed the amount of federal taxes otherwise payable.

17 May 1993 T.I. (Tax Window, No. 31, p. 12, ¶2525)

Where a taxpayer sells shares of a U.S. corporation and receives in exchange therefor an interest-bearing note under which no payments of accrued interests are required for the first three years, with the result that the note is subject to the interest accrual rules under s. 12(4), the taxpayer is not entitled to a foreign tax credit under s. 126(1) until the tax actually is paid. When the interest is paid to the taxpayer in year four and the tax withheld, the taxpayer can amend her tax return for the first three years and claim the credit.

5 March 1993 Memorandum (Tax Window, No. 30, p. 17, ¶2471)

Re treatment of a reimbursement received by an employee after his return to Canada as a result of the agreement of his employer to be responsible for any U.S. income tax liabilities of the individual while on assignment in the U.S.

20 January 1993 T.I. 921629 (November 1993 Access Letter, p. 506, ¶C117-209)

U.S. taxes payable by a Canadian-resident individual on the sale to a U.S. resident of the shares of a taxable Canadian corporation holding U.S. real estate in respect of which an election previously had been made under s. 897(i) of the IRC would be creditable under s. 126(1).

17 November 1992 T.I. 923120 (September 1993 Access Letter, p. 413, ¶C56-250)

Where a lump sum payment is received out of a foreign pension plan and rolled into an RRSP, the numerator under s. 126(1)(b)(i) will not be reduced by any deduction claimed under s. 60(j)(1) for an amount rolled into an RRSP because, under the sourcing rule in ss.4(1)(a) and 4(2), the payment is not reduced by the deduction under s. 60(j)(i).

IT-395R2 "Foreign Tax Credit - Foreign-Source Capital Gains and Losses"

IT-194 "Foreign Tax Credit - Part-Time Residents"

IT-183 "Foreign-Tax Credit - Member of a Partnership"

Articles

Kevyn Nightingale, "American Professionals in Canada", Canadian Tax Journal, (2017) 65:4, 893-937

No additional U.S. tax where income earned directly by U.S. citizen/Cdn resident (p. 898)

…US taxable income will typically be lower than Canadian taxable income. Since Canadian personal income tax rates (including provincial taxes) are higher -at all income levels than US rates, an American in Canada with only Canadian-source income will almost always have little or no US tax.

Potential non-creditability of CFC tax (pp. 903-904)

Where US shareholders collectively own shares with more than 50 percent of the votes or value of a non-US corporation, that corporation is a CFC. [fn 48: IRC section 957(a).] In this context, a "US shareholder" is a US person who owns at least 10 percent of all of the corporation's shares, measured by voting power. [fn 49: IRC section 951(b).]…

[T]he CFC regime can have an impact on a US professional's decision to incorporate in Canada. The inclusion of corporate income in personal income could cause the individual's personal US income to exceed his or her personal Canadian income. As a result, the overall US tax could exceed the overall Canadian tax. The foreign tax credit would then fail to eliminate the US tax, and there would be net US tax in addition to the Canadian tax. This additional US tax would not be effectively creditable in Canada because there would be no US-source income against which the credit could be claimed. [fn: 59: ITA subparagraph 126(l)(b)(i); the definition of "qualifying incomes," in ITA subsection 126(7); and ITA paragraph 4(l)(a).]

Harsh treatment of PFIC distributions (pp. 912-913)

A Canadian corporation is a PFIC to an American owner if [fn 106: IRC section 1297(a).]

  • 75 percent or more of the corporation's revenue is passive, or
  • 50 percent or more of its assets are held to produce passive income.

This rule does not apply to a corporation that is also a CFC, provided that it was incorporated after 1997 [fn 107: IRC section 1297(d)(s).] …

An ordinary distribution is taxed in the year of distribution as ordinary income. … An excess distribution … is treated as though it were earned evenly over the period of ownership of the PFICC interest.

Frequent qualification of medical and legal corporations as PFICs (p. 917)

Medical and legal corporations often qualify as PFICs because they rarely hold much in the way of active business assets. The investment assets can quickly reach 75 percent of the total assets, In this case, distributions from the PC can be taxed in a very adverse manner,…

Potential for U.S. tax to exceed Cdn tax where a professional-corp. ULC retains income (p. 926)

The different challenge that is created with a ULC is that because it is fiscally transparent, all of the entity's income is included in the individual's US personal income. For Canadian purposes, only the portion distributed is subject to personal tax. The corporate tax is eligible for credit, since it is considered to have been paid by the individual. The corporate tax is applied at a low rate.

Thus, if some income is retained within the ULC, there is a potential for the US tax to exceed the Canadian tax. Such US tax would be levied on Canadian-source income and therefore would not be eligible for a foreign tax credit. [fn 183: Paragraph (d) of … "non-business income tax" in … 126(7).] Close attention must be paid to salary and dividend planning to ensure that double taxation is avoided.

Managing a professional corp that is a CFC so that the Cdn effective tax rate exceeds 31.5% (pp. 928-929)

Scenario 1: All Family Members are US Persons

Where all family members are US persons, the company will be a CFC and thus cannot be a PFIC. With a CFC, the problem is the imputation of corporate income to the shareholders….

… Investment in an RRSP is generally effective. While contributions are not deductible for US purposes, given the limited contribution room and the differences in Canadian and US tax exemptions, deductions, and rates, that limitation does not usually create net tax. US tax on income earned inside an RRSP is deferred until the income is withdrawn. [fn 185: Article XVIII(&) of the Canada-US tax treaty,…]

Once the investment income passes the 5 percent threshold … it is usually possible to manage the portfolio so that the Canadian effective tax rate exceeds 31.5 percent. Focusing the corporate portfolio on income-yielding securities will meet this goal. Many professionals will have portfolios inside and outside their PCs (including in their RRSPs). The "outside" portfolios can be focused on growth-oriented stocks….

Having the Cdn family members set up an investment company (sidecar) to which PC lends funds (pp. 929-930)

Scenario 2: Not All Family Members Are US Persons

[T]he substantial majority of practical scenarios involve "mixed marriages"—that is, a marriage between a person who is a US citizen and one who is not. If the professional is the American, the PC is a CFC. If a family member (other than the professional) is an American, the PC may be (or become) a PFIC.

The challenge with a CFC … is that the corporate investment income is imputed to the professional. Since the income is not distributed out of the corporation, there is no related Canadian personal tax, and consequently the foreign tax credit can be insufficient to eliminate the US tax.

The simplest way to solve this problem is to have the non-resident alien family members set up an investment company ("Investco"). The PC then lends excess funds to Investco. …

Investco is free to make investments without the potentially adverse impacts of US tax law, because all shareholders are non-resident aliens. Thus, Investco can invest in Canadian mutual funds without fear of the PFIC rules. …

For Canadian tax purposes, there is no need to charge interest on the loan from the PC to Investco, because intercompany loans are not subject to Canada's attribution rules. [fn 188: ITA subsection 74.4(2).] However, the loan should be made at a market rate of interest, in order to avoid adverse US tax effects.

Dealing with PFIC problem through giving voting control to US family member (pp. 931-933)

With a PFIC, the US-citizen family member is, by definition, a minority shareholder (at least by votes). Dividends paid to that individual are, in the best scenario, ordinary income for US tax purposes. Accordingly, the tax rate can be as high as 39.6 percent. While Canadian tax rates on ineligible dividends have risen significantly (from 31 percent in 2009 to 45 percent currently), it is possible for the Canadian tax to be less than the US tax….

One way to avoid the PFIC problem… [i]s to have the non-resident alien formally commit to voting the shares as directed by the US family members. This action would give the Americans control and turn the company into a CFC. This action may be precluded by a province's corporate legislation or the profession's regulatory body.

In 7 of Canada's 10 provinces (the exceptions being Alberta, Ontario, and Newfoundland and Labrador), the issue can often be dealt with by creating a holding company. The non-resident alien family member can set up a company to hold shares of the professional corporation. It is possible to avoid PFIC status by having the PC distribute its cash to the holding company. All investing is done by Holdco. Since the PC has little or no cash, it can avoid PFIC status….

This approach also works where the professional is a US person and the family members are non-resident aliens making the PC a CFC,…The non-tax issue that arises here is that the professional, who is substantially responsible for the generation of the assets, is not allowed to be a shareholder of Holdco. Otherwise, Holdco becomes a CFC or PFIC to the professional.

Dealing with PFIC problem through a gift of Neuman shares (pp.933-935)

…Alberta, Ontario, and Newfoundland and Labrador disallow corporate ownership of PCs….

For the CFC problem, the "sidecar-loan" strategy is generally the best option. However, where the US person is not the professional, the PC is at risk of becoming a PFIC. The sidecar-loan approach does not work; the loan is a passive asset.

One way of dealing with this problem is to issue Neuman shares to the US spouse (as is typically done) and then have the spouse gift the shares to the professional. That way, the professional ends up as the legal owner. From a US perspective, this is an effective transaction. Dividends paid on the shares are legally the property of the non-resident alien professional, and thus not subject to US tax….

At the time of the gift (which one would desire to have near commencement of the life of the corporation), the shares will have little value, so the quantum of the gift will be small and there will be little gift tax exposure….

For Canadian tax purposes, the gift will cause dividends on the shares to be subject to attribution….

There is a risk that the CRA would see this gifting strategy as abusive, and apply an anti-abuse rule that would void the attribution. [fn 204: ITA subsection 74.5(11).] [fn 205: 2014-0519661E5]

The provision contains a "principal purpose" test. It could be argued that in this case, the family ,member would retain the shares but for the US tax consequences of doing so. The attribution merely puts the family member in the same position as he or she would be absent the gift.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(11) use of gift of discretionary shares to address PFIC issues 306

Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

Pooling of high and low state tax rates (p. 4)

Because the foreign tax credit is computed on a country-by-country pooling basis, where a taxpayer's income from a source in a particular foreign country is subject to a higher foreign tax rate than the corresponding Canadian rate (or higher aggregate foreign taxes applicable to the taxpayer's income from a business carried on in that jurisdiction), the unused excess can be used to subsidize Canadian tax otherwise payable on other business or non-business income from that country, as the case may be, that is subject-to a lower foreign tax rate….

Creditability where domestic Treaty override (p.9)

Where the source state's domestic law expressly provides for taxation in contravention of a treaty, the treaty crediting mechanism would likely not apply (assuming the relevant treaty rule follows the OECD Model, which provides for a credit in respect of tax imposed "in accordance with the treaty"). One could argue that the domestic law credit under section 126 should apply in these circumstances, as a payment of tax in excess of the amount permitted under a treaty should not fail to qualify as a "tax" under general principles where the source state's domestic law imposes the tax under a treaty override. [fn 49: …[S]ee Abraham Leitner and Jon Northup, "The US Inversion Rules and Their Impact on Cross-Border Offerings," 2013 Conference Report… 21: 1-35.] The CRA appears to have accepted this premise in the context of U.S. alternative minimum tax imposed in contravention of the U.S. Treaty, to the extent such tax relates to foreign source income. [fn 50: … 2003-0019751E5… .] Arguably, this analysis could also be applied where foreign tax is imposed in contravention of a treaty under a domestic anti-treaty shopping rule.

Jack Bernstein, "Canada-US Tax Traps for LLCs", Canadian Tax Highlights, Volume 22, Number 2, February 2014, p. 11

FTC problem for undistributed LLC income (p. 12)

Assume that a Canadian-resident individual is a member of an LLC that carries on a trade or business in the United States. The LLC is treated as a partnership in the United States, and a 39 percent US withholding tax applies to income allocable to an individual who is resident abroad. The Canadian resident's eligibility for a foreign tax credit or deduction for the US withholding is limited to his foreign-source income. Thus, if the LLC does not distribute income to the Canadian individual in the same calendar year that the US tax liability arises, foreign taxes and foreign income may be mismatched and double taxation may arise. Moreover, only 15 percent of the US withholding tax is creditable; because the balance is only deductible, there is always some double taxation regardless of the level of foreign-source income.

Kenneth Snider, "The Foreign Tax Credit Rules", 2001 Conference Report, c. 14.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(4.1) 0

Subsection 126(2) - Idem [Authorized foreign bank]

Cases

The Queen v. Bank of Nova Scotia, 81 DTC 5115, [1981] CTC 162 (FCA)

foreign tax translated at FX rate when foreign income earned

The right to claim the tax credit arises in the year that the income in the foreign country is earned. To hold that the amount of the credit is not established until the date that the foreign business-income tax is required to be paid could result in the taxpayer being required to file its tax return before the amount of the credit could be accurately ascertained. In light of the above and generally accepted accounting practice, the amount of foreign business-income tax was translated, for the purpose of calculating the credit, at the weighted exchange rate that prevailed in the year that the foreign business income was earned, rather than the exchange rate that prevailed at the date of payment of the foreign tax over a year later.

Words and Phrases
payable

See Also

4145356 Canada Limited v. The Queen, 2011 DTC 1171 [at at 937], 2011 TCC 220

The taxpayer acquired units in a Delaware limited partnership ("Crown Point"), whose other limited partner ("Altier") and whose general partner were Bank of America subsidiaries and which had elected to be classified as a corporation for purposes of the Code. In light of the right of the taxpayer to require Altier, which was the vendor of the units, to repurchase the units, the taxpayer's purchase of those units was characterized for purposes of the Code as a secured loan, so that the$400 million purchase price for the units was treated as a loan by the taxpayer to Altier, and the partnership distributions made by Crown Point to the taxpayer were treated as deductible interest by Altier. Crown Point had made a loan of $1.6 billion to another Bank of America subsidiary, and paid US corporate income tax on the interest income thereon. The taxpayer included its share of the Crown Point income (essentially this interest income) in computing its income for purposes of the Act, and claimed a foreign tax credit under s. 126(2) based on its share of the Crown Point US corporate tax for the year. The Minister's argued that the taxpayer was ineligible for a s. 126(2) foreign tax credit on the basis that the taxpayer did not itself pay any US income tax.

Webb J. found (at para. 28) that the word "paid" did not require a corresponding liability of the payor to make the payment. Furthermore (at para. 37):

Since the income of the Appellant is its share of the income of Crown Point (from the same sources of income), in determining whether the Appellant paid foreign taxes in relation to this income, the amount of foreign taxes paid by the Appellant should be its share of the foreign taxes paid by Crown Point in relation to that same income, even though Crown Point is a separate legal entity under the laws of Delaware. The Appellant would bear the economic burden of such taxes as such taxes would have to be deducted from the amount that could be distributed to the Appellant.

Words and Phrases
paid

C.I.R. v. HK-TVB International Ltd., [1992] BTC 524 (PC)

The Hong Kong taxpayer received from its Hong Kong parent the exclusive right to sublicense outside Hong Kong films to which its parent had the copyright. In finding that the resulting profits were "profits arising in or derived from Hong Kong" under s. 14 of the Inland Revenue Ordinance (Hong Kong), Lord Jauncey stated (at pp. 530-531):

"The proper approach is to ascertain what were the operations which produced the relevant profits and where those operations took place. Adopting this approach what emerges is that TVBI, a Hong Kong based company, carrying on business in Hong Kong, having acquired films and rights of exhibition thereof, exploited those rights by granting sub-licences to overseas customers. The relevant business of TVBI was the exploitation of film rights exercisable overseas and it was a business carried on in Hong Kong. The fact that the rights which they exploited were only exercisable overseas was irrelevant in the absence of any financial interest in the subsequent exercise of the rights by the sub-licensee ... . If a manufacturer in Hong Kong sells his goods to a merchant in Manilla the payment which he receives is no doubt sourced in Manilla but his profit on the transaction arises in and is derived from his manufacturing operation in Hong Kong."

Leonard Reeves Incorporated v. Minister of National Revenue, 91 DTC 425, [1991] 1 CTC 2293 (TCC)

A U.S. partnership in which the taxpayer had a 45% partnership interest and which had a calendar fiscal year-end disposed of a U.S. trailer park on income account on May 1, 1983. The applicable Canada-U.S. exchange rate to be used in computing the credit under s. 126(2) was the average exchange rate for the 1983 year of the partnership, rather than the exchange rate prevailing on May 1, 1983.

Administrative Policy

8 August 2013 External T.I. 2013-0477461E5 F - Foreign Tax Credit under 126(2) of ITA

taxes paid by non-resident parent on behalf of Canco re foreign country income tax on Canco’s foreign branch profits in that country could be creditable

Canco paid an amount to its non-resident parent (Parentco) to reimburse Parentco for taxes that Parentco had paid to the foreign tax authority as taxes payable by Canco on its income from a branch business that it carried on in that foreign country. CRA stated:

[T]o the extent that a principal/agent relationship exists between Canco and Parentco and that the foreign taxes paid by Canco through Parentco qualify as business-income tax as defined in subsection 126(7), Canco could be entitled to the tax credit under subsection 126(2) with respect to the amount of tax for the Particular Country that it paid to Parentco.

S5-F2-C1 - Foreign Tax Credit

In determining the place where a business (or part of a business) is carried on (and, thus, the source of related business income for foreign tax credit purposes), the CRA generally considers that the situs of the profit-generating activities is as follows (para. 1.53):

  • real estate development and sales – situs of properties
  • merchandise trading – generally place of habitual sales completion
  • securities trading – where trading decisions are made
  • money lending – place of loan arrangement
  • rentals – property location
  • services – place of performance

11 January 2001 Internal T.I. 2000-0001017 - Sourcing of income & foreign tax credit

The Directorate agreed that the taxpayer, which was a Canadian maunufacturer transferring some of its goods to a Japanese branch for sale there, was overstating its profits for purposes of s. 126(2), by treating most or all of the profits on the sale of such products as being profits of the Japanese branch. The taxpayer was required to follow the same method it used to compute its net foreign business income under the Japanese Treaty (namely, computing a notional cost of sales based on an arm's length value of the goods "sold" by the manufacturing division in Canada) as this gave a truer picture of the profits earned in Japan by the Japanese branch.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) place of contract not primary determinant 281

IT-520 "Unused Foreign Tax Credits - Carryforward and Carryback"

Articles

Kyle B. Lamothe, "The Missing Provincial Tax Credit for Foreign Business-Income Taxhttps://www.ctf.ca/ctfweb/FR/Newsletters/Canadian_Tax_Focus/2016/2/160213.aspx", Canadian Tax Focus, Vol. 6, Number 2, May 2016, p. 10

No provincial credits for foreign income taxes on business income (p. 10)

[C]redit for foreign business-income tax from provincial tax...is not available. ...

[I]n what circumstances is there provincial tax on foreign business income but no associated provincial credit? ...

Income taxes of a non-Treaty country applied to income which is allocated under Reg. 400 rules to a province (p. 10)

[W]hen the operations that are taxed in the foreign jurisdiction are not carried on through a permanent establishment…the apportionment formula in regulation 400 attributes all income to the Canadian provinces in which the company has a permanent establishment, and thus provincial tax will be payable. Why would there be foreign tax in this situation? Perhaps the foreign jurisdiction has no tax treaty with Canada…

State income taxes imposed on income allocated to provincial PE

Alternatively, a Canadian taxpayer may carry on a business in certain US states that do not apply the Canada-US treaty; the taxpayer will not have any US federal tax, but it may have a sufficient nexus to a US state to be subject to state tax. Companies in the trucking business are particularly likely to be in this situation, since the use of a state's road system could be considered sufficient nexus for taxation. Thus, the taxpayer -may be subject to provincial tax on the US-source business income but have no ability to claim a foreign tax credit for the US state tax against that provincial tax. ...

Inconsistent Canadian and foreign allocation formulas (p. 10)

[I]f a corporation has a head office in Ontario and other offices abroad, the allocation of income to the various jurisdictions could be different in Canada, which predominantly uses sales and salaries, from the allocation in the foreign jurisdictions, whose sourcing principles might include factors such as capital.

Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

Reduction of Canadian taxes otherwise payable by losses (p.22:5)

Determining worldwide income involves many nuances that affect CTOP and therefore the foreign tax credit that may be claimed. For example, net operating losses claimed in a year will reduce CTOP but will not affect the taxpayer's worldwide income, with the result that the foreign tax credit may be less than the amount of foreign tax paid even if the foreign tax rate is less than the applicable marginal Canadian rate.

Kenneth Snider, Michael Platt, "The Ontario Foreign Tax Credit Regime after Harmonization", International Tax, No. 64, CCH, June 2012, p. 12: Discusses double tax problem that arises inter alia where a Canadian corporation subject to Ontario tax has foreign-source business income but no foreign permananet establishment.

Tremblay, "Foreign Tax Credit Planning", 1993 Corporate Management Tax Conference Report, c. 3.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 0

Subsection 126(2.1) - Amount determined for purposes of para. (2)(b)

Administrative Policy

11 January 2001 Internal T.I. 2000-000101

A Canadian company that was engaged in manufacturing and processing activities in Canada and which had a Japanese branch through which it distributed its products was required to determine the profits of the Japanese branch on the basis that the products manufactured in Canada were treated as purchased by the Japanese branch at fair market value.

8 July 1992 T.I. 921814

Where business profits are allocated to a permanent establishment in a foreign country pursuant to the business profits article of a treaty with that country, "Canada will permit the Canadian company to claim a foreign tax credit, to the extent permitted under the Act, to provide relief from double taxation".

88 CPTJ - Q.5

Deductions of FEDE must first be allocated to a country to the extent of that country's qualifying income to a maximum of the unused notional balance of expenses from that country, and the balance of the deduction may be allocated in any reasonable amount.

Subsection 126(2.2) - Non-resident’s foreign tax deduction

Articles

Steve Suarez, "Tax Planning for Departure from Canada", 1991 Canadian Tax Journal 7, p. 1.

Subsection 126(2.21) - Former resident — deduction

Administrative Policy

11 October 2017 External T.I. 2016-0673171E5 - Foreign tax credit - former resident

emigration-year return generally cannot be opened up more than 6 years later to allow a FTC for foreign tax imposed on a subsequent sale

A Korean individual became a resident of Canada in 2005 while owning Korean real property that had previously been purchased $600,000 and that had a fair market value of $1,000,000. When the individual ceased to be a Canadian resident in 2015, its fair market value was $1,500,000. Given that a taxpayer can change a return for a taxation year ending in one of the 10 previous years, would the individual be permitted to claim a foreign tax credit in the individual’s Canadian income tax return for the emigration year respecting the Korean income taxes paid on the eventual disposition of the real property, which could occur before or beyond 10 years from the emigration year? CRA responded:

[P]ursuant to subparagraph 152(4)(b)(i), paragraph 152(6)(f.1) and subsection 152(4.01) … an assessment to take into account a foreign tax credit under subsection 126(2.21) of the Act in respect of foreign taxes paid is permitted only where the assessment is made within 3 years after the normal reassessment period.

…In our view, subsection 152(4.2) of the Act does not provide for an extension of the statutory assessment period referred to in paragraph 152(4)(b) of the Act for a taxpayer’s emigration year with respect to the deduction under subsection 126(2.21) of the Act.

…The Minister is not obligated to reassess a return simply because a waiver is filed by a taxpayer for a particular taxation year … . [A] blanket waiver request without sufficient details of a transaction would likely not be considered valid. …

2016-066042 … opined that if any of the circumstances to support the deduction under subsection 126(2.21) of the Act (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) of the Act, it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(i) waiver generally not granted to extend 6-year period to permit s. 126(2.21) credit 230

11 October 2017 External T.I. 2016-0660421E5 - Foreign tax credit – former resident

waiver cannot be used to extend period in which foreign tax must be triggered

Where an individual, who had been resident in Canada for over five years, realized a capital gain from the deemed disposition of non-Canadian real property under s. 128.1(4)(b) on emigrating from Canada, he would be potentially eligible under s. 126(2.21) to claim a Canadian foreign tax credit for foreign taxes that become payable on the gain that accrued in Canada, provided that this credit is assessed within the extended reassessment period of six years following the emigration year. Can this period be extended by filing a waiver with CRA? CRA stated:

[I]f any of the circumstances to support the deduction under subsection 126(2.21) … (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) … it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(i) waivers generally cannot be used to extend the 6-year period for claiming a FTC under s. 126(2.21) 302

6 February 2011 External T.I. 2011-0427211E5 - Recovery of Departure tax

the tax credit is limited (under s. 126(2.21(a)) to the total of foreign taxes paid in respect of the disposition that can reasonably be considered to relate to the portion of the gain that arose before the individual's emigration from Canada. Accordingly, where the departure tax is payable in respect of share of a corporation where Part XIII tax is applied on a deemed dividend arising on a winding-up of the corporation occurring subsequent to the individual's departure, there is no credit for that Part XIII tax (which is not a foreign tax).

Subsection 126(3) - Employees of international organizations

Administrative Policy

30 October 2014 External T.I. 2013-0500491E5 - Pension from XXXXXXXXXX

pension income not employment income

Does tax withheld by the European Union on a pension received by a Canadian resident from an EU organization which was his or her former employer qualify for credit under s. 126(3)? CRA responded:

The EU is an international organization for the purposes of subsection 126(3); however, in your client's situation the taxpayer is in receipt of pension income…not income from employment. Therefore, the credit provided in subsection 126(3) is not applicable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 110 - Subsection 110(1) - Paragraph 110(1)(f) - Subparagraph 110(1)(f)(i) EU Treaty does not engage s. 110(1)(f)(i) exemption 98
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) EU withholding does not qualify as state tax 124

9 April 2013 External T.I. 2012-0461051E5 F - Employee of an international organization

credit for local taxes imposed on salary of Canadian resident working for an international organization

A Canadian citizen and resident is working with an organization that provides services with an unidentified relationship with the mandate of the United Nations. Under the terms of an international agreement, the individual’s salary is subject to domestic taxation including source deduction in the country where the individual is working.

After finding that the individual’s income could not be excluded from income through a deduction under s. 110(1)(f)(iii) and was not exempt under s. 81(1)(a) (given the individual's continued Canadian residency), CRA went on to indicate that s. 126(3) could provide a credit, stating:

We are of the view that XXXXXXXXXX constitutes an "international organization" within the meaning of subsection 2(1) of the [Foreign Missions and International Organizations Act] in that it includes XXXXXXXXXX states and governments …[and] no non-governmental organization is admitted as a member … .

[T]he source deductions applicable to your gross salary and made under the XXXXXXXXXX domestic taxation regime could constitute a levy within the meaning of subsection 126(3) in the case of amounts which are used to defray expenses of the organization. In such a case, you could claim a tax credit on your Canadian income tax return for that levy calculated pursuant to subsection 126(3). Such a credit is generally equal to the lesser of the source deductions made by the international organization and the Canadian taxes payable on the remuneration paid by the international organization.

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 8900 - Subsection 8900(1) - Paragraph 8900(1)(b) organization was not a specialized agency related to the UN 114
Tax Topics - Income Tax Act - Section 81 - Subsection 81(1) - Paragraph 81(1)(a) exemption for UN officials did not apply to a Canadian resident 289

6 December 2001 Internal T.I. 2001-0110047 F - Revenu d'emploi organisation intern.

organization that brought together states, government agencies and non-governmental organizations did not qualify as an intergovernmental organization

In finding that an organization did not qualify under s. 2, the Directorate stated:

Under section 2 … an "international organization" means an intergovernmental organization of which two or more states are members. However, XXXXXXXXXX brings together states, government agencies and non-governmental organizations. It therefore appears to us that XXXXXXXXXX is not an intergovernmental organization, but rather a non-governmental organization. … Consequently, income from employment with XXXXXXXXXX cannot give rise to a tax credit under subsection 126(3) … .

Subsection 126(4.1) - No economic profit

Administrative Policy

Articles

Kenneth Snider, "The Foreign Tax Credit Rules", 2001 Conference Report, c. 14.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) 0

Subsection 126(4.2) - Short-term securities acquisitions

Administrative Policy

Manjit Singh and Andrew Spiro, "The Canadian Treatment of Foreign Taxes," draft version of paper for CTF 2014 Conference Report.

Denial of excess credits (p.5)

The rule in subsection 126(4.2) does not fully deny a foreign tax credit, but rather limits the creditable foreign withholding tax to a notional amount intended to equate to the total amount of Part I tax that would be levied under the Act in respect of the taxpayer's profits from the investment (including the dividends or interest and any gain on disposition). By limiting the credit to the total Canadian tax applicable to the particular investment, the rule effectively ensures that any excess foreign taxes paid in respect of the investment cannot be applied as a credit against Canadian taxes payable on income from other sources.

Subsection 126(4.5)

Articles

Edward Miller, Matias Milet, "Derivative Forward Agreements and Synthetic Disposition Arrangements", 2013 Conference Report, (Canadian Tax Foundation), pp 10:1-50

Overview of s. 126(4.5) (pp. 10:41-42)

[S]ubsection 126(4.5) affects a taxpayer's holding period for purposes of applying...subsection 126(4.2), a rule that aims to discourage taxpayers from acquiring shares or debt obligations for the purpose of generating foreign tax credits in respect of foreign withholding taxes imposed on dividends or interest paid on such securities. Subsection 126(4.2) limits the foreign tax credit in respect of dividends or interest on a share or a debt obligation held on income account if the period that began at the time the taxpayer last acquired the security and ended at the particular time is one year or less. Where it applies, new subsection 126(4.5) generally changes to a later date the time of the last acquisition of the share or debt obligation for purposes of subsection 126(4.2), in effect shortening the taxpayer's holding period and thereby potentially causing subsection 126(4.2) to apply in respect of a security that, but for the SDA rules, would have been held for over a year. Subsection 126(4.5) applies if a taxpayer has entered into an SDA with respect to a share or debt obligation owned by the taxpayer and the synthetic disposition period is 30 days or more. Like its counterpart in the dividend stop-loss rules (subsection 112(8)), new subsection 126(4.5) will not apply if, prior to the particular synthetic disposition period, the taxpayer owned the security for a one year period (uninterrupted by a prior synthetic disposition period) prior to the commencement of the particular synthetic disposition period.

Subsection 126(6) - Rules of construction

Paragraph 126(6)(c)

Administrative Policy

5 November 2012 Internal T.I. 2012-0462151I7 - Foreign Tax Credits

Canco held portfolio investments in shares of U.S. companies in connection with funding its insurance liabilities. The shares were mark-to-market properties to it, and it realized a loss on income account from a deemed dispostion of the shares under s. 142.5(2) immediately before the end of its taxation year. After noting that the income of Canco from the shares was from a business carried on by it entirely in Canada, so that in the absence of Treaty the withholding taxes applicable to the dividends on the shares would not be eligible for a foreign tax credit by virtue of the mid-amble to s. 126(1)(b)(i), CRA went on to find that by virtue of Art. XXIV, para. 2 and 3 of the Canada-U.S. Income Tax Convention,

a portion of the income from Canco'’s Canadian XX business must be re-sourced to the U.S. for the purposes of section 126 of the Act. In our view, that portion would be all the income pertaining to the Investments (i.e. the distributions less related expenses and the net mark-to-market loss).

CRA went on to find that, given that gains or losses on the shares were not subject to Canadian income tax by virtue of the Convention, they were deemed by s. 126(6)(c) to be a separate source for purposes of s. 126. Accordingly:

any mark-to-market gains or losses from the deemed dispositions of the Investments would be from a source that produces only tax-exempt income and would not be included in the qualifying income or qualifying losses of Canco by virtue of subparagraph 126(9)(a)(iii) of the Act. Therefore, Canco would compute its...qualifying income and qualifying losses, and its foreign non-business tax credit, without taking into consideration the...net mark-to-market loss on the Investments.

Subsection 126(7) - Definitions

Business-Income Tax

Cases

Canadian Wireless Telecommunications Association v. Nanaimo (City), 2012 DTC 5131 [at at 7250], 2012 BCSC 1017

Ehrcke J. found that a Nanaimo bylaw requiring a $30 charge be collected from cellphone users for each 911 emergency call was a tax rather than a regulatory charge, and therefore was ultra vires the city. Some mobile phone carriers were incumbent local exchange carriers ("ILECs" - in this case, Telus), who owned key network infrastructure. Each ILEC was required under CRTC rules to allow other carriers to access its network at a fair market price. These other carriers were called competitive local exchange carriers. Implementing the proposed fee would have required costly architectural changes to the wireless carriers' networks.

Applying the criteria in Lawson as to when a charge is a tax (in circumstances where it is not imposed under the authority of a legislature): the fee was clearly levied by a public body; the fee was enforceable in law it was essentially compulsory (CRTC rules made 911 service mandatory); and the fee was intended for a public purpose, because 911 service relates to public safety.

See Also

Clevite Development Ltd. v. MNR, 61 DTC 1093, [1961] CTC 147 (Ex. Ct.)

Royalties received by the taxpayer from foreign patents were found to be income from a business rather than income from the mere holding of property notwithstanding that the taxpayer apparently had no business operations at the relevant times because the patents had previously been held in connection with a manufacturing operation of the taxpayer and the licence agreement required the licensor to assist the licensee (although such assistance, in fact, was provided by the foreign parent of the taxpayer).

Administrative Policy

24 November 2013 CTF Roundtable, 2013-0508171C6 - Income or profits tax

gross revenue tax as income tax

Would a tax on gross revenue qualify as an income or profits tax? CRA stated:

[W]e will generally accept that tax paid to a foreign country will be an income or profits tax notwithstanding that it is computed by reference to gross revenue if the tax is part of a comprehensive income tax regime and is tightly linked and subordinate to a tax that is computed by reference to income or profits… .The following factors would be considered indicative…:

* a single tax statute contains the option to pay tax on gross income or tax on net income;

* there is the ability to elect annually between the two taxation regimes; and

* the rate of tax applied on net income is not unreasonably high.

When all of the above factors are present… [we would] accept that it is an income or profits tax

5 September 2013 External T.I. 2011-0431031E5 - Guatemala's taxes

A Guatemalan tax on gross revenue at a rate (for 2013) of 5% up to a low threshold (approx. Cdn. $3,925) and 6% above that, qualified as an "income or profits tax" given that it was imposed under the same "Guatemalan Income Tax Law" which

allows the taxpayer to annually choose whether to pay tax on its gross revenue or to pay tax on its net income or profits….In this way the amount of tax that would be paid on net income or profits acts as the maximum amount of tax that would be payable in a particular year.

The Guatemalan withholding tax on dividends also was an "income or profits tax," as its basis and operation were similar to that for Part XIII tax.

S5-F2-C1 - Foreign Tax Credit

Subject to any treaty provisions (e.g., Art. XXIV, para. 2(a) of the Canada-U.S. Convention), the foreign tax must be levied on net income (but not necessarily as would be computed under the Act) unless it is similar to Part XIII tax (para. 1.7). A state unitary tax will not qualify where, for example, its calculation does not attempt to allocate income to the particular state (para. 1.10, see also 1.18).

11 May 2012 External T.I. 2011-0428791E5 - Foreign Tax Credit

Respecting a question as to whether state franchise tax paid by a Canadian taxpayer (Canco) for the business income tax credit, CRA indicated that the tax should qualify as an income or profits tax if it was determined as an allocated percentage of Canco' net income, so that the credit under s. 126(2) potentially would be available provided that Canco also was carrying on business in the US (which could be the case even if it did not have a permanent establishment there). An extensive list of factors relevant to whether Canco would be considered to be carrying on business in the US is provided.

9 February 2012 External T.I. 2008-0280941E5 F - Foreign sourced income - transportation

NY franchise tax qualified as an income tax only if it was not based on non-income specified minimums

Canco, which carries on a freight transportation business in Canada and the U.S., is subject to New York State franchise tax, which generally corresponds to the highest of the following amounts:

(a) A tax at a fixed percentage of the "Entire net income base" (established using its taxable income determined under US federal tax rules multiplied by a business apportionment factor, based on the relative distance traveled in the State's territory);
(b) A tax on the "Capital base" (its average net worth in a year multiplied by the business apportionment factor);
(c) A tax at a fixed percentage of "Minimum taxable income";
(d) A fixed amount determined for the year based on different parameters.

CRA indicated that the franchise tax would qualify as an income tax only if its amount was calculated based on (a) above, given that “the method of calculating the ‘Entire net income base’ substantially resembles the income and profits taxes imposed under Part I of the Act,” but that:

any other method of determining the New York State tax could not give rise to a claim for an FTC pursuant to subsection 126 (2). In those circumstances, the amount of tax paid by a taxpayer could be deductible against the taxpayer’s business income, depending on the nature of the payment and the applicable provisions of the Act.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(b) s. 4(1)(b) generally applied on a jurisdictional basis 157
Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) incidental business activities in jurisdiction may not constitute carrying on business there 51
Tax Topics - Income Tax Act - Section 126 - Subsection 126(9) s. 4(1)(b) applied for s. 126(9) purposes 161

4 July 2002 Internal T.I. 2002-0148217 - Foreign Tax Credit, U.S. Partnership

Where a limited partners in a U.S. partnership is required to pay U.S. tax on his share of the income of the U.S. partnership, such tax will be considered to be tax in respect of income of the Canadian taxpayer from a business carried on by him in the U.S. and, as such, to be a business-income tax, assuming that the income of the partnership from its assets is business income.

24 October 2000 External T.I. 1999-0015115 - Michigan Single Business Tax

After noting that a foreign entity will be subject to the Michigan single business tax even though it has no income or it is exempt from federal income tax under the Internal Revenue Code, the Agency indicated that that tax would not qualify as an income or profit tax.

2000 Ruling 9929203 - FOREIGN TAX CREDIT - FOREIGN ELECTION

U.S. tax paid by a Canadian corporation as a consequence of an s. 338(g) election and in connection with transactions under which it is acquired by a U.S. purchaser and continued as a U.S. corporation generally will be eligible for a foreign tax credit.

8 November 1999 External T.I. 9914135 - INTEREST & PENALTY RE MICHIGAN SBT

The Michigan single business tax is not an income or profits tax for purposes of s. 126.

Income Tax Technical News, No. 8, 30 September 1996 "Bankrupt Corporation - Change of Fiscal Period"

24 June 1996 Internal T.I. 9612907 - CREDITABILTY OF U.S. BRANCH PROFITS TAX

The U.S. branch profits tax levied under s. 884(a) of the Internal Revenue Code is creditable against Canadian income tax pursuant to s. 126(2) of the Act.

12 August 1996 External T.I. 9620865 - NEW YORK CITY BANKING CORPORATION TAX

In those taxable years in which the liability of a Canadian chartered bank to New York City for Banking Corporation Tax is computed by reference to the basic tax measured on taxable entire net income of the taxpayer allocated to NYC or is computed by reference to the alternative minimum tax measured by alternative entire net income allocated to New York City, the tax is an "income or profits tax". To the extent that the Banking Corporation Tax is computed in a particular taxable year by reference to the alternative minimum tax measured by the issued capital stock of the taxpayer allocated to New York City, the tax would not so qualify.

10 July 1995 External T.I. 9430445 - PENNSYLVANIA FRANCHISE TAX

The Pennsylvania net corporate income tax (imposed on Canadian trucking companies by apportioning their income on the basis of the percentage of their revenue miles attributable to Pennsylvania) qualifies as a "income or profits tax" for purposes of s. 126(7)(a). However, the Pennsylvania franchise tax (which is calculated on the sum of 50% of the corporation's average net income capitalized at the rate of 9.5%, plus 75% of the corporation's net worth minus U.S. $50,000) and the Pennsylvania gross receipts tax do not so qualify, although such taxes are deductible under s. 18(1)(a).

93 C.M.TC- Q. 5

The branch-level interest tax imposed pursuant to I.R.C. s. 884(f)(1)(B) is not considered to be an "income or profits tax" for purposes of s. 126(7)(a) or (c) because it is not imposed on the branch's income or profits.

18 May 1993 T.I. (Tax Window, No. 31, p. 13, ¶2527)

The portion of New York State franchise tax that is based on net income will be considered an income or profits tax paid to a government other than Canada. Where the tax is based on capital or on a minimum tax liability, the Canadian taxpayer will not be entitled to a foreign tax credit, but will receive a deduction from taxable income.

6 April 1993 External T.I. 9301815 F - HA7988 Foreign Tax Credit - Member of Partnership

Where a U.S. partnership in which a Canadian partnership holds a 99.9% interest pays U.S. corporate income tax (as a result of being taxed for U.S. purposes as a corporation) and also withholds U.S. taxes on distributions made to the Canadian partner, the business and non-business income taxes paid by the partnership will be allocated on a pro-rata basis to the partners for purposes of s. 126, and the withholding taxes paid on the distribution of after-tax profit will be considered to be business income tax provided that the profits are considered to be business income as opposed to income from property.

28 January 1993 T.I. (Tax Window, No. 28, p. 9, ¶2403)

Where, under French tax law, a Canadian-resident artistic loan-out corporation effectively is disregarded so that the artist is considered to be directly taxable, a French withholding tax of 15% on the gross income of the loan-out corporation will not give rise to a Canadian foreign tax credit because the artist is the only person legally liable for the French tax.

23 November 1992 T.I. 922181 (September 1993 Access Letter, p. 417, ¶C96-044)

Where a société en nom collectif is liable for French income tax as a result of electing to be taxed as a corporation under French income tax law, a Canadian partner's share of such taxes will be considered a business income tax of the partner.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 39

Non-Business-Income Tax

Cases

The Queen v. Hoffman, 85 DTC 5508, [1985] 2 CTC 347 (FCTD)

It was indicated, obiter, that U.S. social security contributions constituted non-business-income taxes of a U.S. citizen employee of a Canadian company who was resident in Canada. However, s. 126(7)(c)(iv) was later added to the Act to exclude such payments from the definition.

See Also

Marin v. The Queen, 2022 TCC 49

taxes for which FTC accorded must be imposed on the income which generates the Canadian taxes from which the credit is claimed

The taxpayer, a Canadian resident, was generally subject to French income tax on the rental income from a French property to the extent of his interest in a French company (a “société civile immobilière”) holding the property, which was treated as fiscally transparent for French income tax purposes. However, effective January 1, 2019, the French tax on such income commenced to be imposed on a periodic basis during the year as it was earned, rather than being payable in the year following that in which it was earned – and as a result of a transitional relief measure, in 2019 the taxpayer received a credit to offset the French tax otherwise payable in arrears in 2019 on his 2018 rental income.

The taxpayer argued that s.126 should be interpreted to avoid double taxation which, in his view, arose because in 2018 he was subject to tax in France on his French-source income for 2017 and in 2018 was also subject to tax in Canada on his French-source income for 2018. In rejecting such argument, Lafleur J first framed (at para. 45, TaxInterpretations translation) the principal issue as follows:

The issue, therefore, is whether the word "year" in subsection 126(1) as well as in subsection 126(7) (in the definition of "non-business-income tax") refers to the term "taxation year" at the beginning of the subsection and whether the preposition "for" in "for the year" in the same provisions means "during" the year or "in" the year, as claimed by the appellant.

In rejecting the taxpayer’s interpretation, she stated (at para. 58):

If Parliament had intended that foreign taxes paid "in the year" be taken into account in calculating the foreign tax credit, rather than foreign taxes paid "for the year," it would have made this clear, as in section 2.

Regarding “context” and “purpose” she stated (at paras. 63, 67):

[T]he taxation year covered by the foreign tax credit provisions must be the same taxation year for which the taxable income and taxes payable in Canada are determined and computed. …

The purpose of section 126 is to avoid double taxation where foreign source income is taxed both in Canada and abroad. It is therefore clear that the same income must be taxed twice in order for a foreign tax credit to be allowed.

Accordingly, since the taxpayer had not paid any (net) French tax on his income for his 2018 taxation year, he was not entitled to a credit under s. 126(1) in computing his Canadian tax for 2018.

Words and Phrases
for
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 6 may-be-taxed language does not confer an exclusive right to tax 195
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) FTC domestic and Treaty provisions are applied re the particular year in which the subject income was earned 193
Tax Topics - Treaties - Income Tax Conventions - Article 24 Art. 23 of French Treaty inapplicable where income of a particular taxation year was not otherwise taxed twice 246

Zong v. The Queen, 2019 TCC 270 (Informal Procedure)

mandatory contributions to the UK’s national insurance scheme did not qualify for FTC purposes

The taxpayer, a resident of both Canada and the UK, was employed full-time in the UK for several years. CRA denied the taxpayer’s foreign tax credit (“FTC”) claim under s. 126(1) for mandatory contributions that the taxpayer made in 2016 to the UK’s national insurance scheme on the basis that they were not a “tax”. In finding that these contributions were not foreign income “taxes,” Bocock J stated (at paras 10 and 11):

… [T]he Supreme Court of Canada, in … Lawson … listed the following four characteristics of a “tax” …:

a) enforceable by law;

b) imposed under the authority of the legislature;

c) imposed by a public body; and

d) made for a public purpose.

… [T]he mandatory contributions deducted from Mr. Zong’s UK employment income …prima facie do not meet the fourth [requirement]: made for a public purpose. Because the payor receives a direct personal and financial benefit from his or her contributions in the future, the Minister and this Court [citing Yates] have held that such contributions are not a tax for public purposes. …

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 mandatory contributions by a dual resident to the UK’s national insurance scheme did not qualify for Treaty relief 165

Nadeau v. The Queen, 2007 DTC 1670, 2004 TCC 433 (Informal Procedure)

state pension plan premiums not taxes

Premiums paid by the taxpayer to the Maine State Retirement System in the course of her employment as a main teacher did not qualify as taxes because the premiums did not qualify as a levy intended for a public purpose, i.e., the plan in question was a retirement and benefit fund for teachers and employees of the State of Maine only and the objective of the plan was to encourage residents of Maine to work for the state by establishing those benefits, rather than being intended to generate income for the state.

Meyer v. The Queen, 2004 DTC 2393, 2004 TCC 199 (Informal Procedure)

amount paid in error not a tax

The taxpayer, who was a U.S. citizen resident in Canada, did not claim treaty benefits when filing his U.S. return, with the result that his U.S.-source pension income was subject to U.S. income tax at graduated rates rather than the treaty-reduced rate of 15%.

In finding that the excess over 15% did not qualify as a tax, Hershfield J. noted that where the taxpayer has refused to establish that a payment was not an error and refused to correct the error, such overpayment does not qualify as a "tax". It also was appropriate for the Agency to compute the overpayment on the basis that the same rate of graduated U.S. income tax was applicable to both the taxpayer's pension income and employment income.

Words and Phrases
tax
Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 24 overpayment of U.S. tax not U.S. tax 148
Tax Topics - Treaties - Income Tax Conventions - Article 26 85

Yates v. The Queen, 2001 DTC 761 (TCC) (Informal Procedure)

UK pension contribution not a tax

Contributions paid by the taxpayer (a former resident of the U.K. and a dual citizen of Canada and the U.K.) to the U.K. Inland Revenue Department in order to maintain rights to a future old age pension in the U.K. did not qualify as non-business income taxes because the payments were made on a voluntary basis. Campbell T.C.J. quoted Lawson v. Interior Tree, Fruit and Committee of Direction, [1931] S.C.R. 357 that "A tax is a levy, enforceable by law imposed under the authority of a legislature imposed by public body and levied for a public purpose".

Words and Phrases
tax

Yates v. GCA International Ltd., [1991] BTC 107 (Ch. D.)

The U.K. taxpayer was entitled under a contract with a Venezuelan company to £97,345 for its work in carrying out a comprehensive field rehabilitation investigation of three Venezuelan oil fields. Article 54 of the Venezuelan Tax Code deemed the net profits of non-residents originating from non-commercial professional activities to be 90% of the gross receipts (or £87,610 in this case), as a result of which the taxpayer was subject to a Venezuelan tax of approximately £22,353.

The Crown unsuccessfully argued that the Venezuelan tax was not eligible for a foreign tax credit under the Taxes Act (U.K.) by virtue of subsection 498(6) thereof, which provided that the tax credit was only available for taxes which "are charged on income and correspond to income tax or corporation tax in the United Kingdom". Scott J. stated (p. 119):

"It is not self-evident that in the majority of cases to which art. 54 might apply the ten per cent deduction would be a gross underestimate of the level of expenses that would have had to be incurred in order to have earned the gross receipts in question."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) petroleum consulting income rose only partly in field 97

Newfoundland and Labrador Corporation Ltd. et al. v. Attorney General of Newfoundland, 138 DLR (3d) 577, [1982] 2 S.C.R. 260

In finding that a tax of 15% imposed on gross income of a taxpayer from mine operations minus deductions for reasonable expenses and outlays, depreciation, pre-production development expenditures, and doubtful debt reserves constituted an income tax, Martland J. found (p. 586) that the fact that the tax was upon a particular component of the taxpayer's income did not alter its character as an income tax. In finding that a tax imposed on royalties received by persons for the granting of the right to mine properties minus deductions for administrative, accounting, legal and similar expenses; outlays incurred by the taxpayer within the area of the land; and rents and royalties; constituted an income tax, Martland J. noted (p. 588) that it was reasonable, in the case of a person not actually mining the land, for the list of permissible deductions to be more limited.

Inland Steel Co. v. U.S., 677 F. 2d 72, 230 Ct. Cl. 314, 82-1 U.S.TC P9301 (1982)

In finding that the taxes imposed under the Mining Tax Act (Ontario) (the "OMT") on an open pit iron ore mine did not constitute "any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country" for purposes of s. 901(b)(1) of the Internal Revenue Code, the Court stated:

"The key to creditability is not that a particular class of net profit, reached by an accounting procedure that may be acceptable or justified for other considerations, is taxed; to be creditable, the net profit subject to foreign tax must be analogous to the type of net profit reached by the United States income tax. In view of the large-scale ommission from the OMT of significant costs of the mining business, it cannot be said that the net gain of that business is sure, or very likely, to be reached by the tax. For instance, the non-deductibility of land expenses, rent, and private royalties - all or a large part of each of which mirrorimportant costs of mining production - removed from the consideration of the OMT crucial expenses that are normally incurred in the mining business, significant expenses which may well offset any gain the company could make from mining. That same is true about their exploration, development and pre-production costs."

Lai v. MNR, 80 DTC 1044 (T.R.B.)

A Canadian resident paid "property tax" pursuant to s. 5(1) of the Inland Revenue Ordinance (Hong Kong) at a standard rate of 15% on the "net assessable value" of two rental properties in Hong Kong. By virtue of s. 5A, the "net assessable value" was equal to: the estimated annual rent which would be permitted or authorized under the Landlord and Tenant (Consolidation) Ordinance for a lease under which the tenant was responsible for municipal taxes; minus an allowance of 20% for repairs and other expenses.

Tremblay, C.G.A. found the above to be a simplified method for taxing rental income (which eliminated the necessity to assess the gross rentals less expenses for each landlord). The Hong Kong taxes accordingly were creditable as an "income or profits tax."

Canadian Industrial Gas & Oil Ltd. v. Government of Saskatchewan et al., 80 DLR (3d) 449, [1978] 2 S.C.R. 545

Dickson, J. made a finding (at p. 477) in which the majority concurred (at p. 458) that a "mineral income tax" which effectively taxed 100% of the difference between the price received by oil producers at the well-head and the price they formerly received before the increase in oil prices following the 1973 energy crisis, was not an income tax:

"The tax is not levied upon net income. It is more in the nature of a gross revenue tax - as above a statutory figure it becomes a 100% levy - that has generally in the past been regarded as an indirect tax. The tax is in essence a flat sum which will vary according to the sale price of the oil but is not necessarily reflective of actual expense experience. Expenses are discretionary and not inherently deductible so as to fall within the definition of an income tax."

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Subsection 92(2) provincial tax styled as a direct "income tax" was in substance an ultra vires indirct tax on oil exports 128

Bank of America National Trust and Savings Association v. U.S., 72-1 U.S.TC 84456, 198 Ct. Cl. 263, 459 F. 2d 513, cert. denied 490 U.S. 949 (1972)

Taxes levied in Thailand, the Philippines and Argentina on the gross income derived by the taxpayer from its branch bank business in those countries did not constitute "income, war profits, and excess profits taxes" for purposes of s. 901(b)(1) of the Code. The authorities established that a levy on gross income will only qualify as an income tax, "if it is very highly likely, or was reasonably intended, always to reach some net gain in the normal circumstances in which it applies" (p. 84,460) whereas here, the Court could not state with assurance "that there was only a minimal risk that the combination of a bank's expenses plus its bad debt experience (and other losses) would outbalance its net gain or profits in any particular year" (p. 84,464).

Allstate Insurance Co. v. U.S., 419 F. 2d 409 (Ct. Cl. 1969)

Premium taxes which an Illinois stock casualty insurance company (which sold insurance policies in each of the provinces of Canada) paid on the gross amount of premiums it collected in Canada did not constitute a creditable income tax for purposes of s. 901(b) of the 1954 Code because:

"The premiums taxes were not based on gain or profit but on a part of plaintiff's gross income or gross receipts. Plaintiff may have had a gain or it may have had a loss in operating its insurance business during the year in question, but this would not affect the premiums tax it had to pay ... Taxes imposed on insurance premiums for the privilege of transacting business long have been designated an 'excise tax.'" (p. 414)

Words and Phrases
excise tax

Quemont Mining Corp. Ltd. v. MNR, 66 DTC 5376, [1966] CTC 570 (Ex. Ct.), aff'd 70 DTC 6046 (SCC)

Cattanach J. stated respecting the word "profits" in Regulation 1201:

"I can see no justifiable reason for construing the word 'profits' as used in the Regulation in any sense different from the meaning attributed by authorities to that same word as used in the Income Tax Act."

The authorities defined "profits" as "the difference between the receipts from a business for the year and the expenses laid out to earn those receipts."

Words and Phrases
profits

Seley v. MNR, 62 DTC 565, 30 Tax A.B.C. 243

The taxpayer was entitled to claim a foreign tax credit in respect of U.S. social security taxes deducted from his remuneration by his U.S. employer. Since no evidence was adduced at the hearing as to the nature of those taxes, the Board examined the nature of taxes under the Old Age Security Act (Canada), and concluded that because that Act effectively was integrated with the Income Tax Act, the U.S. social security taxes qualified as "income or profits tax".

Abbot Laboratories International Co. v. U.S., 160 F. Supp. 321 (D. Ct. 1958), aff'd 267 F. 2d 940 (C.A. 1959)

The Lanman case was followed in finding that the Colombian patrimony tax was not an income tax within the meaning of s. 131(a) of the 1939 Code. District Judge Campbell, in distinguishing other cases, stated (at p. 331):

"It is stretching the analogy of those cases too far to say that a tax imposed upon the value of certain assets without reference to gain and which is payable parallel to and independently of a general tax on income, is a tax on presumed income."

The patrimony tax was also not imposed "in lieu of" an income tax because they were imposed in parallel to, rather than in substitution for, Colombian income taxes.

Lanman & Kemp-Barclay & Co. of Colombia v. Commissioner of Internal Revenue, 26 TC 582 (1956)

The Republic of Colombia levied, pursuant to the same tax statute under which an income tax and an excess profits tax was levied, a capital tax (referred to as a "patrimony tax") which was "based on the theory that the income tax, in order to be an equitable revenue system, requires a tax on capital to more fairly distribute the burdens amongst the nation's taxpayers and to prevent the state from being penalied if a property owner, through negligence or for some other reason, fails to realize the inherent productive potential of his property" (p. 587). The Colombian tax law deemed the income tax, the excess profits tax and the patrimony tax to be "one and indivisible". The patrimony tax was not creditable as an income tax or a tax in lieu of an income tax for purposes of s. 131 of the Internal Revenue Code of 1939 because, separately considered, it was really a tax on property and resulted in a levy upon the net value of the taxpayer's assets which would include any unrealized appreciation of such value, it was computed separately from the income tax, and a taxpayer could be liable for patrimony tax in a year in which the taxpayer had no revenue and was not liable for income tax. There was no substantial equivalent of the patrimony tax under the American income tax system.

Words and Phrases
income tax

Commissioner v. American Metal Co. (1955), 221 F. 2d 134 (2d Cir. 1955), cert. denied 350 U.S. 829 (1955)

A Mexican production tax which was applicable when ore was extracted from the subsoil, irrespective of whether it was subsequently processed or sold, and which was levied at a rate which varied progressively with the market price of the metal, was not a creditable income tax for purposes of s. 131(a) of the 1939 Code. With respect to the variable rate of the tax, Circuit Judge Hincks stated (p. 139) that "merely because the state charges more for the release of its ore where the value thereof is high does not mean that the charge is a tax on the miner's profits."

B.C. Insurance Co. v. MNR, 54 DTC 422, 11 Tax A.B.C. 225

A 10% tax imposed under the Income Tax and Social Services Contribution Assessment Act 1936-1952 (Australia) on the gross amount of premiums received by the Australian branch of the taxpayer were creditable under s. 38(1) of the 1948 Act as a "tax paid by him to the government of a country other than Canada on his income from sources therein". The Australian income tax computation under that statute was governed largely by the same principles as obtain in Canada, and the exacting of 10% of gross premiums could be regarded as "merely a simplified means of determining the amount taxable, as it eliminates the necessity ... of filing returns of income with detailed financial statements attached thereto". The words in s. 38(1) "mean the income tax as imposed, in its wisdom, by 'the country other than Canada' ... no matter what the rate of tax may be or how it is computed."

Helvering v. Queen Insurance Co. (1940), 115 F. 2d 341 (2d Cir. 1940), cert. denied 312 U.S. 706 (1940)

A U.S. stock insurance company doing a fire and marine business in the U.S. and Canada became liable in 1934 for Canadian excise upon its Canadian premiums of $5,405, and deducted the Canadian excise tax from its Canadian income tax liability for that year of $6,924 pursuant to s. 7 of the 1917 Income War Tax Act, which provided that a taxpayer was entitled to deduct from the tax otherwise payable by him under that Act the amount paid for the corresponding period under the provisions of Parts II and III of the Special War Revenue Act of 1915. The Court held that only the difference of $1,519 was creditable as an income tax pursuant to s. 131(a) of the 1934 Code:

"If the Canadian statute had happened to say that the taxpayer might deduct the income tax from what would otherwise be payable as excise, the opposite result would have followed; and that, no doubt, is somewhat capricious, but the caprice, if there is any, is that of our own law, which allows the one credit and not the other. That puts it upon the taxpayer to prove that he has paid an actual income tax, not that an income tax would have been payable, if the facts had been 'otherwise'. (p. 342)"

London County Council v. A.G., [1901] A.C. 26, 4 TC 265 (HL)

S.24(3) of the Customs and Inland Revenue Act, 1888 provided that "upon payment of any interest of money or annuities charged with income tax under Sched. D, and not payable ... out of profits or gains brought into charge to such tax," the payer was required to withhold and remit tax "out of so much of the interest or annuities as is not paid out of profits or gains brought into charge." Since Schedule A rents were "brought into charge," the taxpayer was exempt from this withholding requirement with respect to interest paid by it out of its rental income (chargeable under Schedule A) in addition to interest paid out of its interest income (chargeable under Schedule D). Although the standards of assessment (e.g., annual value in the case of Schedule A) under the different Schedules varied according to the source, "in every case the tax is a tax on income, whatever may be the standard by which the income is measured" (pp. 37-38). Therefore, the first part of s. 24(3) should be interpreted as referring to interest or annuities being charged with a special kind of income tax, but instead to the assessment of income tax in accordance with the provisions of Schedule D.

Lord Davey added (pp. 44-45) that although "it is said that the tax imposed on property within Sched. A is not strictly an income tax, because it is levied on the annual value of property and not on the profits received by the owner ... that arrangement is but the means or machinery devised by the Legislature for getting at the profits."

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Legislative History 33

Administrative Policy

18 November 2024 External T.I. 2021-0917031E5 - UK pensions and lifetime allowance charge

excess-value charges on UK-source pension payments imposed by HMRC did not qualify as foreign income tax

At the time of a “benefit crystallization event” (e.g., retiring or turning 75), the UK tax authority (HMRC) imposed a charge (the “lifetime allowance charge”) on 25% of the amount by which the total value of a pension plan member’s pension entitlements exceeded a threshold amount (recently, £1,073,100). HMRC considered that the charge was not a tax on income and, thus, could be imposed on a Canadian resident notwithstanding Art. 18 of the Canada-UK Treaty.

In finding that the charge, even though collected by way of deduction against pension payments made to a Canadian-resident pension plan member, did not qualify for a foreign tax credit, CRA stated:

While the Charge is a charge to tax, it is not computed on income or profits, nor is it similar to the tax imposed under Part XIII of the Act. Rather, the Charge is computed on the basis of the size of a taxpayer’s pension scheme, measured against a specified limit (i.e., the “lifetime allowance”), and is levied when a “benefit crystallization event” results in the payment of benefits which exceed that limit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(1) - Paragraph 56(1)(a) - Subparagraph 56(1)(a)(i) deduction of excess-value charge on UK-source pension payments did not reduce pension income under s. 56(1)(a)(i) 189

3 February 2016 External T.I. 2014-0548111E5 - U.S. tax paid in respect of an LLC's income

LLC tax paid by Cdn member not re business

Mr. A, Canadian resident and citizen, was a members of an LLC carrying on a U.S. active business and which was treated as a partnership for Code purposes. In each of 2013 and 2014, Mr. A paid U.S. individual income tax of $400 on his share of LLC’s income of $1,000, and did not receive any dividends from LLC or any other U.S. source. Absent ss. 20(11) and (12), would the $400 of US tax paid by Mr. A in 2013 and 2014 be a “non-business-income tax”? In responding "yes," CRA stated:

[T]he business carried by LLC, as well as the income earned by LLC, would for purposes of the Act be respected as being the business (and the income) of LLC and not a business carried on, or the income of, the members of the LLC. As such, the $400 of US tax paid by Mr. A in each of 2013 and 2014 on his share of LLC’s income for those years should be viewed as “non-business-income tax”... .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) - Paragraph 88(3)(d) no deemed dividend 133
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) only income was taxable capital gains 136
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) s. 20(14) deduction for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 439
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) FTC for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain 331
Tax Topics - Treaties - Income Tax Conventions - Article 24 Treaty sourcing rule does not trench on domestic FTC 215

10 June 2016 STEP Roundtable Q. 9, 2016-0634941C6 - Support for US FTC Claims

CRA now requiring transcripts or proof of payment to the IRS in reviewing FTC claims for U.S. taxes

Recently, CRA has been requesting taxpayers to obtain a transcript from the IRS where foreign tax credits were claimed for U.S. tax paid. Why this change in practice?

CRA indicated (partly in its oral response) that in 2015, in the context of reviewing foreign tax credit claims, it decided to extend, to U.S.-source income, its practice for other countries of requiring a copy of the foreign tax return as well as a copy of the foreign notice of assessment (or other equivalent document) from the foreign tax authority.

However, if the taxpayer is not able to provide a copy of the notice of assessment, the transcript or equivalent document from the foreign tax authority, CRA (in light of feedback) will now accept proof of payment to (or refund from) the authority. That proof can come in the form of bank statements, cancelled cheques, or official receipts so long as certain information is clearly indicated, including that the payment was made to, or refund received from, the authority, and the amount and date (and related tax year) of the payment (or refund).

In its official response, CRA added:

[T]here is a certain level of expectation that a more pro-active approach will be adopted to ensure that the required documents are requested or obtained in anticipation of a possible review by the CRA. ...

According to the IRS website “Most requests will be processed within 10 business days”. ...

[T]he IRS has a very structured process for requesting tax account transcripts online or through the mail using Form 4506-T. ... In addition, the majority of the U.S. states have an online system which allows the taxpayer to print his/her “account statement” which would confirm the taxpayer’s final tax liability.

2015 Ruling 2015-0572541R3 - Foreign Tax Credit on Transfer of 401(k) to RRSP

additional 10% tax on withdrawal from 401(k) plan, as income tax

A Canadian-resident individual (the "Individual") contributed to a 401(k) plan while employed in the U.S. He will withdraw the amount in the plan in a lump sum and contribute to a newly-established RRSP. The lump-sum withdrawal will be subject to U.S. withholding taxes under Code s. 1441(a), and to an additional tax of 10% of its amount under Code s. 72. CRA ruled:

For the purposes of the definition of "non-business-income tax" in subsection 126(7) of the Act, the withholding taxes and the additional US tax equal to 10% of the lump-sum payment…will constitute income or profits taxes paid by the Individual to the government of the US.

See summary under s. 126(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) s. 60(j) deduction does not reduce foreign source income for FTC purposes 195
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(j) 31

2015 Ruling 2015-0570291R3 - Foreign tax credit on income from a trust

withholding on IRA proceeds

After ruling that proceeds from an IRA of a deceased U.S. resident which were distributed by her estate to a U.S.-resident trust, and by it to Canadian-resident beneficiaries, were income to them under s. 104(13)(a), CRA ruled that the U.S. withholding tax thereon of 15% would qualify as a non-business income tax. See summary under s. 104(13).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 104 - Subsection 104(13) distribution of IRA proceeds by U.S.-resident trust is income under s. 104(13)(a) 301

23 July 2014 Internal T.I. 2014-0525231I7 - Foreign tax credit

foreign tax not a "tax" if no refund sought

Canco received a dividend from a Japanese resident company foreign affiliate ("Forco"), which was subject to Japanese withholding tax and resulted in gain under s. 40(3). In the same taxation year, Canco distributed its Forco shares to its non-resident parent as a dividend-in-kind. Canco paid Japanese income tax on the capital gain reported on such disposition and also reported a capital gain for Canadian tax purposes – but later determined (with CRA's concurrence) that the fair market value of the shares had been nil. No Japanese tax refund was pursued and Canco instead claimed a foreign tax credit against the Canadian income tax payable on the taxable portion of the s. 40(3) gain.

The Directorate stated:

Given that the taxpayer chose not to advise the Japanese tax authorities of the revised valuation and did not attempt to obtain a refund of tax, the case law [e.g., Meyer] would lend support to the position that absent any evidence to the contrary the tax paid to the Japanese tax authorities was voluntary and as such, should not be considered to be a "tax" within the meaning of subsection 126(1).

See more detailed summary under s. 126(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) s. 40(3) gain had Cdn source/foreign tax not a "tax" if no refund sought 426
Tax Topics - Treaties - Income Tax Conventions - Article 24 s. 40(3) gain had Cdn source because not taxed in Japan 238

10 June 2013 STEP Roundtable, 2013-0480371C6 - 2013 STEP Question 13 - US LLCs and 20(11)

US tax is paid on the income of an LLC by an individual resident in Canada to which the LLC is not a controlled foreign affiliate (so that its income is not FAPI). CRA noted, before responding to a different issue, that if no distribution were made in the year by the LLC, there would be no amount included in the individual's income so that: the US tax paid by the taxpayer would be deductible under s. 20(12) and not under s. 20(11); and that to the extent the tax was not deducted under s. 20(12), it would be creditable for purposes of s. 126(1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) s. 20(11) becomes applicable where LLC income distributed 282

S5-F2-C1 - Foreign Tax Credit

Subject to any treaty provisions (e.g., Art. XXIV, para. 2(a) of the Canada-U.S. Convention), the foreign tax must be levied on net income (but not necessarily as would be computed under the Act) unless it is similar to Part XIII tax (para. 1.7). Examples of taxes which do not qualify as business income taxes, but which may be considered non-business income taxes (para. 1.21., 1.27) are:

  • U.S. taxes on U.S. business income of an S-Corp which is levied on the U.S.-citizen shareholder who is resident in Canada
  • foreign capital gains tax on foreign business property
  • foreign taxes on Canadian business income1

5 October 2012 Roundtable, 2012-0451251C6 F - Excess of foreign tax withheld at source

foreign withholdings on American depositary receipts in excess of Treaty-limited rate does not qualify as an income tax

Tax is systematically withheld on income from ADRs at above the maximum rates permitted by the conventions. Can such withholdings be considered foreign income taxes in their entirety? CRA responded:

[T]he excess amount unduly paid could generally be recovered from the foreign tax authority. From a Canadian point of view, this excess amount would be considered as a "voluntary tax". As such … this amount would not qualify as an "income or profit tax". No foreign tax credit could be granted in respect of the excess amount. …

In addition, it would not be deductible under subsection 20(11).

Words and Phrases
income or profits tax
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose tax withheld in excess of Treaty-rate is not deductible as an expense 69

19 April 2011 Memo 2011-0398741I7

10% additional tax on IRA withdrawal not a penalty

The taxpayer’s U.S. 1040NR showed a normal US tax payable and a 10% additional US tax payable on the withdrawal from a U.S. IRA, with the additional US tax payable because of the early withdrawal, pursuant to Code s. 72(t), which provided:

If any taxpayer receives any amount from a qualified retirement plan…the taxpayer's tax for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of such amount which is includible in gross income.

The Directorate accepted the taxpayer’s position that the 10% additional tax paid was not a penalty but an additional tax imposed under Code, based on the Nelson case.

12 June 2009 External T.I. 2009-0316511E5 F - Charges sociales et autres retenues France

social security contributions do not qualify as income taxes – but French "contribution sociale généralisée" and "contribution pour le remboursement de la dette sociale" so qualify

Can the following deductions made by France from the salary of an individual who has been resident in Canada for less than 60 months qualify as a non-business income tax for s. 126 purposes:

  • CSG ("contribution sociale généralisée" ["general social contribution"])
  • CRDS ("contribution pour le remboursement de la dette sociale " [contribution for the repayment of the social debt])
  • Sécurité sociale vieillesse [old age social security] (retirement)
  • Pole emploi (similar, in your opinion, to Employment Insurance)
  • Retraite complémentaire [supplementary pension] (according to you, mandatory)?

CRA responded:

By virtue of paragraph 1 of Article XV of the Convention, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. …

If the employee performs employment in France while resident in Canada, France may tax the employee to the extent provided in Article XV of the Convention and Canada may allow a foreign tax credit for non-business income taxes paid by the employee to France. … 2002-0169607 states that the "contribution sociale généralisée" and the "contribution pour le remboursement de la dette sociale" qualify as a non-business income tax … since these contributions have the legal characteristics of a tax (levied without direct consideration) as opposed to social contributions which, in turn, confer on those who pay them a right to benefits. … [S]ocial security contributions generally do not qualify as income or profits taxes because they are not really taxes at all, within the judicially accepted meaning of that term. However, as an exception, the CRA will agree to treat a contribution to a public pension plan of a foreign country by a Canadian resident employee as a non-business-income tax for the purposes of section 126 … where the employee is required to make the contribution under the foreign law and it is reasonable to conclude that the employee will not derive any pecuniary benefit from the contributions given the short and temporary nature of the individual’s employment in the foreign country. This exception, however, does not seem to apply in the situation presented … .

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 18 list of pension plans recognized for French tax purposes re Art. XXIX(5) of French Treaty 423

6 May 2008 External T.I. 2007-0254661E5 F - Partie B Medicare

U.S. Medicare Part B premiums are not non-business income tax

In finding that premiums paid for U.S. Medicare Part B by a recipient of U.S. pension income did not qualify as foreign non-business income tax, CRA stated:

Part B of Medicare is medical insurance that helps to pay for doctors' services and many other medical services, as well as medical products and appliances not covered by hospital insurance (Part A). More detailed information on Medicare coverage is available in Medicare & You at www.medicare.gov.

In our view, U.S. social security tax includes payroll taxes paid by employees (Medicare tax) but does not include premiums paid for Medicare Part B deducted from Social Security cheques.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Private Health Services Plan U.S. Medicare Part B premiums may be eligible respecting the medical tax credit 82

11 September 2007 External T.I. 2006-0195851E5 F - Crédit pour impôt étranger

if Romania denies refund of withholding tax improperly held on management fees, CRA nonetheless will deny FTC

Xco, a Canadian corporation without a permanent establishment in Romania and owning more than 50% of the shares of S.A.co, a Romanian corporation, charges reasonable fees to S.A.co for its management services. According to the Tax Code of Romania, management fees paid to a non-resident of Romania are subject to withholding tax of 15%, which is described as final and not subject to adjustment. The Other Income Article (Art. 21) of the Convention provides that items of income not dealt with in the foregoing Articles that is derived by a resident of Canada from sources in Romania may be taxed in Romania.

Do the management fees come within Art. 21 and, if not, can a foreign tax credit be claimed under s. 126 for the 15% withholding tax? CRA responded:

In most treaties where management fees or charges are not specifically dealt with, the business profits provisions are considered to include reasonable management fees. Taking into account that on the facts Xco does not have a permanent establishment in Romania to which the management fees are attributable, the CRA would treat the net income attributable to the fees earned by Xco as "business profits", exempt from tax in Romania under Article 7 of the Convention. In our view, Article 21 of the Convention is therefore not applicable to the management fees. Given that such fees constitute business profits, the CRA would not grant a foreign tax credit for the 15% withholding tax on them since Xco should be entitled to claim a tax refund from the Romanian authorities and it must claim it and challenge any refusal of refund before the Romanian administrative authorities.

If the request for a refund from the Romanian tax authorities is denied and the assessment is upheld, Xco may follow the procedures outlined in Article 25 [re MAP] … and make a written request to the CRA's Legislative Policy Directorate for a foreign tax credit.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 7 reasonable management fees come within the business profits rather than other income Article 231

8 November 2004 External T.I. 2004-0092021E5 F - RDTOH: Foreign tax credit under sub. 126(1)

foreign tax on royalty income generated from a Canadian business generating IP gave rise to credit under s. 126(1) rather than s. 126(2)]

A CCPC derives its income for a taxation year from property situated in Canada and from a business carried on in Canada (the generation of intangible property) that generates foreign royalties on which it pays tax to a foreign government. Such foreign tax paid does not qualify for the foreign business income tax credit under s. 126(2) since such business income is not considered to be income from a business carried on outside Canada, and instead entitles the CCPC to the s. 126(1) credit.

CRA confirmed that this foreign tax credit in respect of its Canadian business income reduced its refundable dividend tax on hand ("RDTOH") under (former) s. 129(3)(a)(i)(A) and thus caused the CCPC’s Canadian property income to be subject to a higher rate of Canadian tax than it would otherwise be.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 129 - Subsection 129(4) - Non-Eligible Refundable Dividend Tax on Hand - Paragraph (a) - Subparagraph (a)(i) - Variable B RDTOH was reduced by s. 126(1) credit even where it related to a Canadian business rather than a source of property income 217

13 July 2004 External T.I. 2003-0049081E5 - FTC beneficiary of Canadian resident trust

Where the Canadian beneficiary of a Canadian trust is required to pay U.S. income taxes on his or her share of income earned by the trust in respect of U.S. real estate, such taxes generally will qualify as non-business-income tax.

1 February 2005 External T.I. 2004-0083921E5 F - Société mandataire, gain & CIÉ

US taxes paid by a corporation based on falsely representing that the related gain was its gain could generate a FTC to the Canadian shareholder for which it in fact was agent

A corporation acquired a building in the US as agent for its individual shareholder pursuant to a nominee agreement. However, when a capital gain was realized on a disposition of the building, the corporation filed a US return that represented the capital gain as having been realized by it, and it paid US corporate income tax on that gain. Regarding whether the individual shareholder could claim a foreign tax credit for the tax, CRA stated:

The principal would be considered to have disposed of the property in question at the time the corporation, as agent, disposes of it. We agree with you that, in these circumstances, the gain from such a disposition would be the principal's gain. Once a property located in a foreign country has been disposed of by a corporation, as part of a mandate to, inter alia, dispose of the property and pay income tax to the tax authorities of the foreign country on profits, income or gains of a principal, the tax so paid by the corporation could be considered to be that of the principal.

26 June 2003 Internal T.I. 2002-0169607 F - Sécurité sociale française

French payroll taxes and social security contributions qualified as non-business income taxes
Also released under document number 2002-01696070.

Payroll taxes and social security contributions under the French social security system qualified of for a foreign tax credit given inter alia that the French social security system was similar to that of the US (FICA) and Germany. The Directorate stated:

For the 2001 taxation year in question, we consider that the mandatory and final payments that are made under the French social security system by a resident of Canada constitute "income or profits tax". Thus, the "Payroll Taxes" and "Social Security Taxes" in this situation must be considered "non-business income taxes" … .

22 January 2001 External T.I. 2000-0012025 F - cotisations sociales

Belgian social security contributions imposed on Belgian director’s fees (treated as self-employed earnings for Belgian purposes) were non-business-income taxes

A resident Canadian, who is a self-employed professional, earned director’s fees as a result of serving on the board of a Belgian company. These were treated for Belgian tax purposes as self-employed earnings and were subject to required social security contributions (pursuant to a regime separate from the Belgian personal income tax legislation) to be made to a social insurance fund that was an agent for the Belgian government. Since the contributions were computed on a lagged three-year basis, his initial contributions were computed on a provisional basis.

After noting that, from a Canadian perspective, the contributions were paid in respect of income from an office or employment, CCRA concluded that ”the final and compulsory social security contributions provided for under the Belgian social security scheme for self-employed persons, and which are paid by a resident of Canada in respect of income from an office or employment (for the purposes of the Act) earned in Belgium, would constitute “non-business-income taxes”, and in its summary, noted that “[s]ocial security contributions are compulsory, computed on the basis of income.”

3 November 1998 External T.I. 9810115 - FOREIGN TAX CREDIT AND S-CORPORATIONS

Where a U.S. citizen had emigrated to Canada while owning real property situate in the U.S. with a cost of $100 and having a fair market value at the time of emigration of $1,000, the U.S. income tax paid on a subsequent disposition of the property for $1,100 would qualify as a non-business-income tax notwithstanding that a portion of the gain arose prior to the emigration.

16 September 1997 Background Paper for Round Table Question No. 9717730

Discussion of situations where U.S. persons resident in Canada become liable for U.S. AMT solely as a result of the application of the rule limiting the AMT foreign tax credit to 90% of tentative minimum tax. In these situations, the Canadian foreign tax credit is allowed for the portion of U.S. AMT on U.S. source income sourced to Canada only.

12 April 1995 External T.I. 9237145 F - Foreign Tax Credits - Consolidated Foreign Returns

Where a profitable Canadian subsidiary is permitted for U.S. tax purposes to be included in a consolidated group tax return, payments made by the Canadian subsidiary to its parent as compensation for the U.S. tax paid by the parent in respect of the Canadian subsidiary's share of the consolidated group income will not qualify as income or profits tax.

23 March 1994 Administrative Letter 9332416 F - Japan Inhabitant's Tax — Income or Profits Tax

The municipal inhabitant's tax imposed by Japan is an income tax with the exception of any per capita tax included in that tax.

29 March 1994 Administrative Letter 9317296 F - 6359 Foreign Tax Credit - Social Security Contributions

Mandatory contributions made to a foreign social security plan, which is similar to the U.S. one, for example, to the German social security plan, will constitute an "income or profits" tax for purposes of s. 126(1) and s. 115(2)(e)(i)(A). However, voluntary contributions to the social security plans of countries other than Canada will not be considered to be income or profits taxes.

8 March 1994 External T.I. 9302945 F - 6359 Foreign Tax Credit - Social Security Contributions

Contributions made by a Canadian resident, temporarily working in Germany, to a German government pension plan and a German government health plan will qualify as an "income or profits tax" for purposes of s. 126(1).

10 February 1993 Memorandum (Tax Window, No. 29, p. 5, ¶2432)

Foreign tax paid in respect of a capital gains reserve that was included in income in the foreign jurisdiction would normally qualify as a non-business income tax, i.e., provided the taxpayer has s. 126(1)-type income from a particular country, it is not necessary that there be any income from that country for Canadian tax purposes to which the non-business income tax directly relates.

18 July 1991 Memorandum (Tax Window, No. 6, p. 15, ¶1359)

The U.S. alternative minimum tax imposed by s. 55 of the I.R.C. is an income or profits tax. The apportionment of the U.S. alternative minimum tax between business-income tax and non-business income tax is essentially a question of fact.

6 May 1991 T.I. (Tax Window, No. 3, p. 27, ¶1240)

The Canadian beneficiaries of a U.K. trust whose trust income is subject to 45% U.K. tax are not entitled to claim a foreign tax credit under s. 126 with respect to such tax (although they may apply directly to the U.K. Inland Revenue for a refund, which refund would be included in their income when received).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Nature of Income 36

20 March 1991 T.I. (Tax Window, No. 1, p. 19, ¶1157)

The U.S. "excess retirement distributions excise tax" which is levied on the aggregate distributions from qualified pension plans is not an income tax.

25 March 1991 Memo 7-4727

US withholding on share redemption was income tax

US withholding taxes paid on the redemption of preference shares of a US subsidiary qualified as income or profits taxes within the meaning of s. 126(7)(c) given that

under U.S. income tax law all distributions of property from a U.S. corporation are considered to be dividends unless there exists certain prescribed conditions. One of the required conditions is that the corporation has no "earnings and profits" at the time of the distribution of property [as was the case here.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) US withholding on share redemption was income tax 87

15 October 1990 T.I. (Tax Window, Prelim. No. 1, p. 23, ¶1021)

Any excess U.S. tax paid by a Canadian resident individual as a result of a sub-chapter S election is creditable for purposes of s. 126(1).

90 C.P.T.J. - Q.10

Where a foreign country has no income taxes but a very high royalty rate on the production under an oil and gas production sharing contract (i.e., 85%), the royalty will not constitute a tax for purposes of s. 126.

89 C.R. - Q.4

RC accepts apportionment of foreign income and foreign taxes paid when a foreign country's taxation year differs from Canada's calendar taxation year. The income and taxes are to be apportioned based on the portion of income earned during the calendar year.

88 C.R. - Q.57

To the extent that a tax-sparing provision within a Convention deems an amount to have been paid to the government of a foreign country, the taxes spared will qualify as a "non-business income tax."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) Treaty inapplicability 40

Articles

Kailey McLeod, Nadia Pulla, "Misalignment of Federal and Provincial Tax Credits", Canadian Tax Focus, Vol. 9, No. 4, November 2019, p.8

Absence of tax credit for US estate taxes in Ontario and B.C. (p. 8)

[B]ecause US federal and state estate taxes are an inheritance tax and not a tax on account of income or profits, they are eligible for a foreign tax credit only because of article XXIX B(6) of the Canada-US tax treaty. …

[T]he majority of provinces have enacted legislation that aligns the federal and provincial foreign tax credits on US estate taxes. However, there is no specific provision in either the Ontario or British Columbia income tax act that allow for a provincial tax credit on US estate taxes (see … 2010-0379381E5 …)

Absence of provincial relief re tax sparing (p. 8)

Another mismatch situation can arise with respect to calculating the business-income and non-business-income tax credits when a Canadian tax treaty provides for tax sparing with a foreign country (such as Bangladesh, India. Brazil, Jamaica, Pakistan, and Nigeria). …

2016-0632711I7 … [indicates] that Ontario taxpayers are not entitled to a provincial foreign tax credit on amounts spared under the Canada-Brazil tax treaty, but the CRA has not provided commentary on the tax implications in regard to other provinces and/or other tax treaties. This issue is more likely to arise with respect to non-business-income tax since the provinces do not have business-income tax credits for corporations…

Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

Determination of partner's share of partnership tax (p.9)

[T]he suggestion [1.39 of S 5-F2-C1] that a taxpayer's share of taxes paid by a partnership should be the same as its share of partnership income (a pre-tax computation) raises concerns in the context of withholding taxes deducted from payments to a partnership where the amount withheld is determined based on the withholding rate that would apply to each partner….The authors understand from informal discussions with the CRA that this statement in the Folio was not intended to require a pro rata redistribution of foreign withholding taxes…

Matthew Warren, Eileen Scott, Alan Fischl, Sergio Lugo Dimas, "U.S. Foreign Tax Credibility of the Mexican Cash Deposits Tax", Journal of International Taxation, October 2013, p. 37

Imposition of IDE (p. 37)

…The Mexican government enacted the cash deposits tax (impuesto a los deploacutejsitos en efectivo) (IDE) in 2007…

Not an income tax if a separate levy (p. 44)

If it were a separate levy, the IDE would not appear to be an income tax in the U.S. sense, since it is imposed on the gross amount of cash deposits and so would not meet the net gain requirement of Reg. 1.901-2(b). The tax also would not appear to qualify as an "in lieu of" tax under Section 903 if viewed as a separate levy because it does not meet the substitution requirement.

But should not be treated as a separate levy as it functions as collection mechanism (p. 44)

The IDE should be creditable to the extent and in the amount that it is ultimately used as a credit against other creditable Mexican taxes, such as the income tax, on the tax returns for these taxes. In these instances, the IDE functions as a collection mechanism for the taxes, as any balance of the IDE is refunded.

Michael J. Welters, "Foreign Tax Credits and the Locality of the Source of Employment Income", Taxation of Executive Compensation and Retirement, Vol. 21, No. 8, April 2010, p. 1278.

Robert Couzin, "The Foreign Tax Credit", 1976 Conference Report, p. 69.

Lanthier, "Emerging Income Tax Issues: Public Service 2,000, International Finance Companies, and U.S. Limited Liability Companies", 1993 Conference Report, pp. 3:19 - 29: discussion of U.S. limited liability companies.

Tremblay, "Foreign Tax Credit Planning", 1993 Corporate Management Tax Conference Report, c. 3.

West, "The Seventh Circuit Rules on Certain Controversial Foreign Tax Credit Issues: Continental Illinois v. Commissioner", Tax Management International Journal, October 8, 1993, p. 539: Discussion of Brazilian interest withholding tax of 25% in respect of which borrowers taking out loans duly registered with the Brazilian Central Bank could receive a pecuniary benefit equal to 85% of the tax paid on the interest. [See s.126(7)(c)(v)] Owen, The Foreign Tax Credit (1961): Chapter 2 contains an extensive discussion of the American jurisprudence on what constitutes an income tax or a tax in lieu of an income tax.Subject to any treaty provisions (e.g., Art. XXIV

Subsection 126(9)

Administrative Policy

9 February 2012 External T.I. 2008-0280941E5 F - Foreign sourced income - transportation

s. 4(1)(b) applied for s. 126(9) purposes

Canco, which carries on a freight transportation business in Canada and the U.S., is subject to New York State franchise tax. CRA noted that in determining the “qualifying income” of Canco:

The general rules for determining the source of income, losses and deductions provided for in paragraph 4(1)(b) must therefore be applied, all as specified in subsection 4(3). Paragraph 4(1)(b) could be textually interpreted to require the computation of items of income distinctly with respect to each of the places where the business of a taxpayer is carried on. In practice, however, this provision is generally applied to allocate the income, losses and deductions of a taxpayer on a jurisdictional basis.

… Income allocation based on the ratio of distance traveled in a jurisdiction over the total distance traveled is generally not acceptable under subsection 126(2). That is a simplified method that does not take into account all the facts applicable to a particular case.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(b) s. 4(1)(b) generally applied on a jurisdictional basis 157
Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) incidental business activities in jurisdiction may not constitute carrying on business there 51
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Business-Income Tax NY franchise tax qualified as an income tax only if it was not based on non-income specified minimums 238

Paragraph 126(9)(a)

Administrative Policy

18 February 2003 Internal T.I. 2003-0182997 F - Calcul du revenu net étranger à 126(1)b)(i)

qualifying income not reduced by s. 110(1)(d) deduction
Also released under document number 2003-01829970.

In finding that the s. 110(1)(d) deduction is not to be taken into account in computing net foreign income under s. 126(1)(b)(i), the Directorate stated:

The reference to subparagraph 110(1)(f)(i) in subparagraph (a)(i) of the definition of "qualifying incomes" and "qualifying losses" in subsection 126(9) clearly implies, in our view, that in computing foreign net income under subparagraph 126(1)(b)(i), all other items of income, including those that gave rise to a stock option deduction under paragraph 110(1)(d), must be taken into account. … The reference to paragraph 110(1)(d) in the adjustments to the taxpayer's world income in subclause 126(1)(b)(ii)(A)(III) also supports our conclusion.