27 October 2005 External T.I. 2004-0103431E5 F - Crédit d'impôt étranger-Gain en capital
Principal Issues: [TaxInterpretations translation]
1(a) Is a capital gain on the disposition of a principal residence outside Canada that is reduced as a result of the application of paragraph 40(2)(b) of the Act qualifying income for the purposes of subsection 126(9)? (b) If so, assuming the taxpayer has sufficient other non-business income, can the foreign tax credit (FTC) be deducted from the Canadian tax otherwise payable?
2 If the taxpayer decides not to designate the property as the taxpayer’s principal residence and offsets the taxable capital gain on the disposition by claiming allowable capital losses, can the taxpayer deduct an FTC from Canadian tax otherwise payable?
Position:
1(a)The taxable capital gain is qualifying income. 1(b) Yes
2. Yes.
Reasons:
1 and 2. If the taxpayer has sufficient non-business income from a particular country, a FTC may be claimed even if no tax under the Act arises from the income underlying the foreign tax.
XXXXXXXXXX Danielle Bouffard
2004-010343
October 27, 2005
Dear Madam,
Re: Request for a technical interpretation:
Subsection 126(1) of the Income Tax Act (the "Act")
This is in response to your letter of November 5, 2004, requesting our opinion on the above subject. We apologize for the delay in responding to this request.
Facts
Mr. A is a Canadian resident. He owned a condominium in Florida for his personal use on which he received no rental income. Mr. A disposed of the condominium and realized a capital gain that was taxed in the United States. Mr. A is not a resident of the United States.
For the purposes of filing a T1 return, Mr. A designated the condominium as his principal residence for all the years he owned it. He used the exemption in paragraph 40(2)(b) of the Act to eliminate the capital gain on the disposition of the condominium.
Questions
1. Is the capital gain on the disposition of the condominium that is reduced to nil as a result of the application of paragraph 40(2)(b) qualifying income for purposes of subsection 126(9)? If so, assuming Mr. A has sufficient other non-business income, can the foreign tax credit ("FTC") be deducted from the Canadian tax otherwise payable?
2. If Mr. A decides not to designate the condominium as his principal residence and offsets the taxable capital gain from the disposition by claiming allowable capital losses, can he deduct a FTC from Canadian tax otherwise payable?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Subsection 126(1) allows a taxpayer to deduct from tax payable an amount in respect of non-business-income tax paid to a foreign country. However, the amount that may be so deducted may not exceed the limit set out in paragraph 126(1)(b), which is the proportion of the tax otherwise payable by the taxpayer under Part I of the Act which represents the amount determined under subparagraph 126(1)(b)(i) compared to that calculated pursuant to subparagraph 126(1)(b)(ii). In general terms, the numerator of that fraction is the amount, if any, by which the total of the taxpayer's "qualifying income" from sources in the relevant foreign country exceeds the total of the taxpayer's "qualifying losses" from such sources. Taxable capital gains or allowable capital losses are one of the components of qualifying income or loss.
The terms "qualifying incomes" and "qualifying losses" are defined in subsection 126(7) by reference to subsection 126(9). Thus, subsection 126(9) provides, inter alia, that "qualifying incomes" and "qualifying losses" for a taxation year of a taxpayer from sources in a country are to be determined without reference to the amounts listed in paragraph 126(9)(a), namely, any portion of income that was deductible under subparagraph 110(1)(f)(i) or in respect of which an amount was deducted under section 110. 6, as well as any income or loss from a source in the foreign country if any income of the taxpayer from that source would be tax-exempt income. An amount of income used in computing qualifying income is an amount of net income computed in accordance with the provisions of the Act. In calculating a taxable capital gain, the rules in sections 38 to 55 must be considered. If a taxpayer takes advantage of the principal residence exemption in paragraph 40(2)(b), the capital gain will be reduced or eliminated. For the purposes of the computation in paragraph 126(1)(b), if the taxpayer's only qualifying income from a source in a country other than Canada is a capital gain and the capital gain is reduced to nil because of the provisions of paragraph 40(2)(b), no FTC can be claimed. On the other hand, if the taxpayer has sufficient non-business income from that particular country, a FTC may be claimed even though no tax under the Act arises from the income underlying the foreign tax (i.e., in this example, the capital gain was reduced to nil by paragraph 40(2)(b)).
You have not specified the nature of the property that may give rise in a taxation year to allowable capital losses to Mr. A, nor the country involved. For purposes of this discussion, we have assumed that allowable capital losses for the year are deductible in computing the taxpayer's income under section 3 and that the only taxable capital gain realized by Mr. A is from the disposition of the condominium. Consequently, if for a taxation year Mr. A decides to reduce the taxable capital gain to nil by claiming allowable capital losses, the tax consequences would be the same as those described in the previous paragraph for the purposes of the calculation under subsection 126(1).
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
For the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch