Section 126

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. …

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.

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).

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.

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.

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.

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.

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).

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)… .

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… .

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.

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.

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.

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)... .

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.

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.

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.

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.

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.

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)".

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.

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).

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.

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.

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).

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).

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.

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.

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.

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".

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.

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.

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).

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.

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.

General discussion.