Mr. C, who is a Canadian resident and U.S. citizen, settled a revocable living trust for him and his family which, as a “grantor trust”, is disregarded for Code purposes, so that for Code purposes all trust income is that of Mr. C. However as Mr. C is a “resident contributor” to the trust, the trust is subject by virtue of s. 94(3) to Canadian income taxation on its worldwide income. Since the Code taxes are not payable by the trust, it cannot cannot claim a foreign tax credit or an s. 20(12) deduction. Could this mismatch be remedied by him electing under s. 94(16) so that the trust’s income will be attributed to him?
As Mr. C is the only contributor, he would report under s. 94(16)(a) 100% of the income earned by the trust. S. 94(16)(c) would deem such income to have a U.S. source for purposes of s. 126 and paras. (c) and (d). Thus, Mr. C can claim the foreign tax credit under s. 126(1), in respect of the foreign income that the trust designates under s. 94(16)(c). As para. (c) does not apply for purposes other than those specified, pursuant to s. 94(16)(b) Mr. C’s income under s. 94(16)(a) remains sourced to Canada for the purposes of s. 20(11), so that he canot cannot claim a deduction under s. 20(11). Finally, Mr. C may claim a deduction under s. 20(12) in respect of the US income tax he paid in respect of the income attributed to him under s. 94(16)(a).