Taxpayer, a U.S. citizen and Canadian resident, owns a portion of the shares of a Canadian unlimited liability company (“ULC”), which is treated as a partnership for Code purposes. ULC holds interests in U.S. limited liability companies earning U.S. active business income (“LLCs”) through a U.S. limited liability company holding company (“Holding LLC”). Holding LLC and the LLCs are each disregarded entities for Code purposes and made no distributions of income. From a Code perspective, partnership income reported by ULC was allocated to each of its members, so that Taxpayer paid U.S. income taxes based on the individual's percentage share ownership of ULC.
Is Taxpayer entitled to a s. 20(12) deduction for the U.S. taxes paid? CRA responded affirmatively:
The CRA has previously stated that the U.S. taxes paid by the Canadian resident individual on the allocation of income from a LLC where the individual indirectly holds an interest in the LLC through a corporate entity that is fiscally transparent for U.S. tax purposes (i.e., the ULC) would be considered foreign non-business income tax for purposes of the deduction under subsection 20(12) [see 1999-0010295]. This position is based on the fact that the U.S. taxes are considered to have been paid by the taxpayer in relation to, or in respect of, the shareholdings of ULC and not in relation to any business carried on by the taxpayer himself.
… There is a logical connection between the income from ULC and the U.S. taxes paid by Taxpayer because if Taxpayer did not own such shares, no U.S. taxes would have been paid [citing Smidth].