A Canadian-resident individual owns an interest in a Canadian LP (“LP”), that owns an interest in a U.S. LP (“Holding LP”), which has elected to be a corporation for Code purposes. Holding LP’s source of income (allocated pro rata to LP, and then to the individual) was distributions from LLCs earning active business income in the U.S. that was distributed to Holding LP. Would the individual be entitled to deduct a pro rata share of the U.S. income taxes paid by Holding LP on the income of the LLCs (which are disregarded under the Code)?
After referring to “the CRA’s long standing treatment of foreign taxes paid by a partnership for purposes of the foreign tax credit rules in section 126 and the findings… in Smidth… (2012 TCC 3, aff’d 2013 FCA 160)," CRA stated:
a partner’s non-business income tax, within the meaning of subsection 126(7), paid to a particular foreign country includes the partner’s share of any non-business income tax paid to that country through the accounts of the partnership. Consequently, any foreign tax credit under subsection 126(1) or deduction under subsection 20(11) or 20(12) may be claimed by the particular partner, provided all requirements of these provisions are otherwise met.