(3)-(29)

Where the assets of a proprietorship are transferred to a corporation for consideration including a note payable, interest on money borrowed by the corporation from a financial institution to repay such note will be deductible.

Where a loan subject to s. 20.2(2) is refinanced, s. 20(3) will apply to treat the new loan as a continuation of the old loan.

A parent corporation is not entitled to a deduction under s. 20(4) to which a subsidiary would have been entitled if it had not been wound-up into the parent.

A taxpayer intends to offer employees and their spouses an all-expenses-paid week-long trip to a resort located outside of North America, in which they will participate in various team building sessions and sessions related to improving their understanding of the taxpayer's business. CRA indicated that such a trip is not a "convention" under s. 20(10). As per para. 11 of IT-131R2, CRA does not consider intra-company meetings, seminars, courses, etc. to be conventions from the employees' perspective.

" A U.S. citizen is required to pay U.S. tax on dividends and capital gains at a 20% rate (increased from the previous 15% rate). Does this mean that such citizen if also resident in Canada is only entitled to a deduction under s. 20(11) with respect to the additional 5% tax?

CRA stated that Art. XXIV, para. 5 of the Canada-U.S. Treaty is "a complete code in respect of the deductions and credits available to U.S. citizens resident in Canada for the purposes of eliminating double taxation on dividends, interest, and royalties," and that the deductions thereunder "are available in place of deductions under subsections 20(11) and 20(12), and are typically more advantageous to the taxpayer."

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). As this tax is independent of whether there is any distribution from the LLC that has been included in computing the taxpayer's income for the year, should it be concluded that s. 20(11) can never apply in these circumstances as the U.S. tax is not paid "in respect of" the individual's income?

In responding, CRA first noted 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). CRA then stated:

On the other hand, in a year that the taxpayer receives a distribution from the LLC there would be an amount of dividend income included in computing the taxpayer's income for the year from the LLC. In our view the words "tax paid …as may reasonably be regarded as having been paid in respect of" in paragraph 20(11)(a) are broad enough to connect a US tax computed on the profits of the LLC to the dividend from the LLC. Therefore, in computing the taxpayer's income from the shares of the LLC, there may be deducted under subsection 20(11) the amount, if any, by which the amount of the US tax paid by the taxpayer exceeds 15% of the amount of such dividend income.

Discussion of the interaction of s. 20(11) and paragraph 5 of Article XXIV of the U.S. Convention.

Is the US tax paid by a Canadian-resident taxpayer on the income (which also is foreign accrual property income) of an LLC which is owned by it (and is a controlled foreign affiliate) considered to be foreign accrual tax in respect of the LLC?

After responding that the US tax paid by the taxpayer would not qualify as FAT, CRA went on to note that any amount included under s. 91(1) in respect of the FAPI would be considered income from sources in the US for purposes of ss. 20(11) and 126(1), so that an individual taxpayer could deduct under s. 20(11) any portion of the US tax paid for the year in excess of 15% of the s. 91(1) income inclusion. "Any excess [i.e., the 1st 15%] will be eligible for a foreign tax credit under subsection 126(1) and any of the excess US tax paid that cannot be utilized by the foreign tax credit may be deducted from income pursuant to subsection 20(12)."

A deemed-resident s. 94 trust realized a capital gain and incurred gains tax of $10,000 for U.S. purposes on disposing in the U.S. of marketable securities but, for purposes of the Act, realized capital gains of only $20,000 (with Canadian tax thereon of $2,900) due to the securities' ACB previously having been stepped up under s. 128.1(1)(c). Before finding that a full foreign tax credit was available, CRA stated:

[T]he deduction of foreign non-business income tax provided under subsection 20(12)...is not available in the context of a capital gain, since the subsection 20(12) deduction is only available in computing income from business or property, and the foreign taxes have to be paid in respect of such income. In this case, the foreign taxes paid by the trust are in respect of a capital gain, and not any income from business or property as determined under Canadian law or foreign law.

Canco, and its wholly-owned subsidiary, Cansubco, are the 99.9% and 0.1% partners of USLP, which is a partnership for Canadian purposes and has elected to be a corporation for U.S. tax purposes. USLP holds all the shares of USLLC, which has elected to be disregarded entity for US tax purposes. USLLC earns active business income. USLLC has not distributed any dividends to USLP. For US tax purposes, USLP declares the active business income earned by USLLC. Would Canco be entitled to a s. 20(12) deduction where the US tax paid by USLP on business income is not in respect of the income that Canco would potentially receive as dividend income from USLLC shares held by USLP? CRA responded:

The phrase "in respect of that source" found in subsection 20(12) requires that the foreign taxes paid must be paid in respect of the particular business or property to which the tax relates. In other words, for the purposes of claiming the deduction in subsection 20(12), the computation of income from a business or property should be on a business-by-business and/or property-by-property basis. Therefore…in computing the income of Canco and Cansubco from the shares of USLLC (as partners of USLP), USLP cannot deduct, under subsection 20(12), the foreign taxes paid by it on income from business, computed under US tax law, because USLP would generally only receive income from property under Canadian tax law.

CRA went on to note that the prohibition against recognizing tax paid by a corporation in respecting income from foreign affiliate shares also applied in light of s. 93.1(1).

A Canadian resident individual taxpayer reported the income (which was not distributed) of a wholly-owned S Corporation in his U.S. tax return in 2006. He claimed a deduction under s. 20(12) respecting the U.S. tax that he paid on such income. CRA stated:

[A] deduction in a taxation year under subsection 20(12)…for U.S. tax paid by the taxpayer for the year in respect of his share of income of an S Corporation is not to be denied even though the taxpayer does not receive a distribution from the S Corporation in the year. …

[I]t has been Rulings' long-standing position that a loss may be created after the deduction of non-business-income taxes under subsection 20(12) as long as the foreign taxes sought to be deducted relate to an income source which is income from a business or property, even if there is no gross income from that source in the year the foreign tax is liable to be paid or if gross income from that source is less than the foreign tax paid.

"Amounts received out of an IRA are treated as pension income under paragraph 56(1)(a) of the Act and under the Treaty and not as income from a business or property. Accordingly, neither subsection 20(11) or 20(12) of the Act can apply to allow a deduction."

May foreign tax attributable to a taxable capital gain be deducted under s. 20(12), notwithstanding that capital gains are not income from business or property? CRA responded:

Until 1991, subsection 20(12) began with the words "In computing the income of ...". This would indicate that foreign taxes paid in respect of capital gains would have been deductible under that prior language. ... Subsection 20(12) was amended by Bill C-15 effective for 1992 and subsequent taxation years. The Technical Notes of the Department of Finance indicate that the amendment was made to ensure that the deduction was available only with respect to foreign taxes paid in respect of income from business or property. Thus under the current wording any foreign taxes paid in respect of a capital gain would not be deductible under subsection 20(12).

A Canadian exporter that exports to a particular country without carrying on business there and is subject to an income tax of that country, will not be allowed a tax credit, but the foreign tax can be deducted under s. 20(12) in computing the exporter's Canadian income.

Because the deduction is only available in the computation of income from a business or property, foreign tax paid on the disposition of a foreign principal residence will not give rise to a deduction under s. 20(12).

Where a taxpayer, whose only leasehold improvements (Class 13) were with respect to office space in a building, moves to a new building in which it does not acquire leasehold improvements, it is entitled to a terminal loss.

A Canadian-resident Vendor agreed to sell all the assets of its business, having a fair market value of $1,000, to the Canadian-resident Purchaser. Deferred revenue which the Vendor had previously included in its income under s. 12(1)(a) was $400. The parties agree to a $400 offset against the asset purchase price of $1,000 in consideration for the Purchaser's assumption of the Vendor's commitments.

After noting that if a s. 20(24) election were made, the Vendor would be entitled to deduct $400 and that amount would be included in the Purchaser's income under s. 12(1)(a), CRA noted that there is no prescribed form for the election. If no election was made, the Vendor would not be entitled to the deduction, and the payment would be included in the Purchaser's income under s. 9 or 12(1)(x).

"We are of the view that subsection 20(24) of the Act may also apply to a transferred obligation for which an amount has been included in the taxpayer's income in a taxation year under paragraph 12(1)(e)."

As a partnership may be regarded as a taxpayer for purposes of s. 20(24), where a partnership that is being dissolved pays to the surviving partner who will continue the business as a sole proprietor as described in s. 98(5) a reasonable amount for undertaking to assume the partnership's obligations described in paragraph 12(1)(a), an election may be available to the partnership and the sole proprietor under s. 20(24).

Discussion of the application of s. 20(24) where one corporation that has received prepaid rent on a leased building transfers the building to a related corporation and they make the s. 20(24) election.

In the normal case where the sale of a business occurs on capital account, the vendor would not be able to deduct a payment described in s. 20(24) in the absence of the election.

Where a taxpayer incurs soft costs in respect of an addition to an existing building, the deduction under s. 20(29) is restricted to the taxpayer's income from renting the addition.