Subsection 126(1) - Foreign tax deduction
Cases
Interprovincial Pipe Line Co. v. MNR, 68 DTC 5093, [1968] CTC 156, [1968] S.C.R. 498
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)).
Interprovincial Pipe Line Co. v. MNR, 59 DTC 1229, [1959] CTC 339, [1959] S.C.R. 763
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
White v. The Queen, 2003 DTC 1170, 2003 TCC 668
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
2015 Ruling 2015-0572541R3 - Foreign Tax Credit on Transfer of 401(k) to RRSP
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)… .
23 July 2015 T.I. 2014-0546571E5 - Foreign Tax Credit
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 T.I. 2013-0500491E5 - Pension from XXXXXXXXXX
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.
23 July 2014 Memorandum 2014-0525231I7 - Foreign tax credit
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.
11 September 2014 T.I. 2013-0495091E5 - Reimbursement of employee's foreign tax
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.
10 June 2013 STEP Roundtable Q. , 2013-0480311C6
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 Memorandum 2013-0476381I7 - Deemed Resident Trusts & Foreign Tax Credit
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.
27 March 2013 Folio S5-F2-C1
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).
20 February 2003 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.
5 April 2001 T.I. 2000-004361
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 T.I. 2000-002957
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 T.I. 982008
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 T.I. 951618 (C.T.O. "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 T.I. 942293 (C.T.O. "Foreign Tax Credit (HAA7988-1)")
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.
1994 December Tax Executives Institute Roundtable Q. , 5-943052
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 Memorandum 933143 (C.T.O. "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-270R2 "Foreign Tax Credit"
IT-395R2 "Foreign Tax Credit - Foreign-Source Capital Gains and Losses"
IT-194 "Foreign Tax Credit - Part-Time Residents"
IT-506 "Foreign Income Taxes as a Deduction from Income"
IT-183 "Foreign-Tax Credit - Member of a Partnership"
Articles
Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", draft version of paper for CTF 2014 Conference Report
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.
Subsection 126(2) - Idem [Authorized foreign bank]
Cases
The Queen v. Bank of Nova Scotia, 81 DTC 5115, [1981] CTC 162 (FCA)
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.
See Also
4145356 Canada Limited v. The Queen, 2011 DTC 1171 [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.
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 Inc. v. MNR, 91 DTC 425 (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
27 March 2013 Folio S5-F2-C1
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 Memorandum 2000-0001017
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.
IT-520 "Unused Foreign Tax Credits - Carryforward and Carryback"
Articles
Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", draft version of paper for CTF 2014 Conference Report
Reduction of Canadian taxes otherwise payable by losses (p.4)
[T]here are many nuances to the determination of world-wide income that impact 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 impact the taxpayer's world-wide income, with the result that the foreign tax credit may be less than the amount of foreign tax paid even where 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.
Subsection 126(2.1) - Amount determined for purposes of para. (2)(b)
Administrative Policy
11 January 2001 Memorandum 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
6 February 2012 T.I. 2011-0427211E5 -
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 T.I. 2013-0500491E5 - Pension from XXXXXXXXXX
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.
10 February 1994 Memorandum 933403 (C.T.O. "Employees of International Organizations")
General discussion.
Subsection 126(4.1) - No economic profit
Administrative Policy
27 March 2013 Folio S5-F2-C1
The evaluation of expected profitability is made over the entire period for which the property is expected to be held. S. 129(4.1) is not applied independently to a related transaction involving another property acquisition (para. 1.29).
Articles
Kenneth Snider, "The Foreign Tax Credit Rules", 2001 Conference Report, c. 14.
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", draft version of paper for CTF 2013 Conference Report.
Overview of s. 126(4.5) (pp. 32-3)
[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 Memorandum 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
See Also
Clevite Development Ltd. v. MNR, 61 DTC 1093 (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 Q. , 2013-0508171C6
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 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.
27 March 2013 Folio S5-F2-C1
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 T.I. 2011-0428791E5
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.
18 July 2002 Memorandum 2002-0148217 -
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 T.I. 1999-001511 -
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.
1999 Ruling 992920
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 T.I. 991413
The Michigan single business tax is not an income or profits tax for purposes of s. 126.
Income Tax Technical News, No. 8, 3 September 1996 "Treatment of United States Unitary State Taxes".
4 September 1996 T.I. 961290 (C.T.O. "Creditability 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 T.I. 962086
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 T.I. 943044 (C.T.O. 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 TI 9301815
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.
Non-Business-Income Tax
Cases
Yates v. The Queen, 2001 DTC 761, Docket: 2001-72-IT-I (TCC)
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".
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
Nadeau v. The Queen, 2007 DTC 1670, 2004 TCC 433
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
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.
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."
Re Newfoundland & Labrador Corp. Ltd. and Attorney-General for 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, 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."
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)
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."
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.
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."
Administrative Policy
2015 Ruling 2015-0572541R3 - Foreign Tax Credit on Transfer of 401(k) to RRSP
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).
2015 Ruling 2015-0570291R3 - Foreign tax credit on income from a trust
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).
23 July 2014 Memorandum 2014-0525231I7 - Foreign tax credit
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).
10 June 2013 STEP Roundtable Q. , 2013-0480371C6
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).
27 March 2013 Folio S5-F2-C1
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
13 July 2004 T.I. 2003-004908 -
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.
3 November 1998 T.I. 5-981011
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 T.I. 923714 (C.T.O. "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 T.I. 933241 (C.T.O. "Japan Inhabitant's Tax - Income or Profits Tax (4093-J2)")
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 T.I. 931729 (C.T.O. "6359 for Tax Credit-Social Security")
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 T.I. 930294 (C.T.O. "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).
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 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.]
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."
IT-506 "Foreign Income Taxes as a Deduction from Income"
Articles
Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", draft version of paper for CTF 2014 Conference Report
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