In 1990, FA disposed of capital property giving rise to a $10,000 capital gain for ITA purposes and a gain for Code purposes of $20,000). After deduction of $8,000 under s. 40(1)(a)(iii) and a deductible loss under s. 95(1)(b)(v), FA has no FAPI in 1990. Under the Code, $15,000 of the $20,000 gain is deferred until 1991.
In computing its 1991 FAPI, FA recognizes a $6,000 taxable capital gain ("TCP") under s. 40(1)(a)(ii). Its total FAPI is $10,000 due to interest income of $6,000 less a s. 95(1)(b)(v) deductible loss of $2,000. Under the Code, FA computes taxable income of $16,000 (subject to 38% tax) comprising the $15,000 deferred gain plus the $6,000 of interest less a loss carry-forward of $5,000.
What portion of this tax can be reasonably regarded as applicable to the 1991 FAPI? CRA stated:
[F]oreign tax paid in respect of a capital gain may reasonably be regarded applicable to an amount included in computing a taxpayer's income by virtue of subsection 91(1)… to the extent that such foreign tax is required to eliminate the Canadian income tax that would otherwise be payable in respect of the gain under the FAPI rules… .
In order to determine what portion of the net FAPI was attributable to the TCG…it is necessary to allocate the deductible loss to the two types of FAPI income. In our view this should be done on a pro rata basis thereby producing a figure of $5,000 for the TCG portion of the FAPI (i.e. $6,000 - [6000/(6,000 + 6,000) x $2,000]).
The total U.S. tax paid in the year was $6080 (i.e. the taxable income for U.S. tax purposes of $16,000 multiplied by the U.S. tax rate of 38%) The portion of such amount that is applicable to the capital gain computed pursuant to Canadian tax law is in our view $2,316 (i.e. the proportion of the U.S. tax that the capital gain for Canadian tax purposes is of the U.S. taxable income before the application of the U.S. loss carry-forwards). …
The portion of the $2,316 that would need to be considered reasonably applicable to the 1991 FAPI TCG in order to eliminate Canadian tax in respect thereof would be $1,900 as this amount multiplied by the relevant tax factor for the purposes of paragraph 91(4)(a) produces a deduction equal to the 1991 FAPI TCG ($5,000). A further deduction in respect of U.S. tax paid on the balance of the capital gain reported for U.S. tax purposes may be available under subsection 91(4) of the Act if the original disposition of the property gave rise to an income inclusion under subsection 91(1) of the Act in the 5 immediately preceding years. …
The amount included in computing Canco's income in 1991 by virtue of subsection 91(1) of the Act in respect of the passive interest earned by FA after the deduction of the relevant portion of the deductible loss is $5,000 (i.e.$6,000-[6,000/(6,000 + 6,000) x $2,000]). The U.S. tax that may be reasonably regarded as applicable to such interest is $1,737 (i.e. the proportion of the U.S. tax that the interest income for Canadian tax purposes before the deduction of the deductible loss is of the U.S. taxable income before the application of U.S. loss