The taxpayer, a Canadian resident, was generally subject to French income tax on the rental income from a French property to the extent of his interest in a French company (a “société civile immobilière”) holding the property, which was treated as fiscally transparent for French income tax purposes. However, effective January 1, 2019, the French tax on such income commenced to be imposed on a periodic basis during the year as it was earned, rather than being payable in the year following that in which it was earned – and as a result of a transitional relief measure, in 2019 the taxpayer received a credit to offset the French tax otherwise payable in arrears in 2019 on his 2018 rental income.
The taxpayer argued that s.126 should be interpreted to avoid double taxation which, in his view, arose because in 2018 he was subject to tax in France on his French-source income for 2017 and in 2018 was also subject to tax in Canada on his French-source income for 2018. In rejecting such argument, Lafleur J first framed (at para. 45, TaxInterpretations translation) the principal issue as follows:
The issue, therefore, is whether the word "year" in subsection 126(1) as well as in subsection 126(7) (in the definition of "non-business-income tax") refers to the term "taxation year" at the beginning of the subsection and whether the preposition "for" in "for the year" in the same provisions means "during" the year or "in" the year, as claimed by the appellant.
In rejecting the taxpayer’s interpretation, she stated (at para. 58):
If Parliament had intended that foreign taxes paid "in the year" be taken into account in calculating the foreign tax credit, rather than foreign taxes paid "for the year," it would have made this clear, as in section 2.
Regarding “context” and “purpose” she stated (at paras. 63, 67):
[T]he taxation year covered by the foreign tax credit provisions must be the same taxation year for which the taxable income and taxes payable in Canada are determined and computed. …
The purpose of section 126 is to avoid double taxation where foreign source income is taxed both in Canada and abroad. It is therefore clear that the same income must be taxed twice in order for a foreign tax credit to be allowed.
Accordingly, since the taxpayer had not paid any (net) French tax on his income for his 2018 taxation year, he was not entitled to a credit under s. 126(1) in computing his Canadian tax for 2018.