A U.S. citizen resident in Canada holds a controlling interest in a U.K. company. The U.S. imposes its one time transition tax on the "earnings and profits" of the U.K. company held at certain dates in 2017. Would Canada view such U.S. transition tax as an "income or profits tax" under s. 126(7) of the Act when applying the foreign tax credit ("FTC") rules?
After noting that U.S. Subpart F income resembles FAPI under the ITA and that the U.S. tax paid by the individual on the individual’s share of the U.S. Subpart F income would qualify as an income tax for the purposes of the Canadian foreign tax credit rules, the difficulty in the example was that it was not clear if any income is sourced to the U.S., given that U.S. Subpart F income is not deemed to be income under Canadian domestic law, so that the relevant component in the formula would be zero, and a foreign tax credit would not be available.
Furthermore, as the transition tax would be paid for 2017, a foreign tax credit would not be available in any other year, even if the tax burden were to be borne in annual instalments.