Lois PollockRulings Directorate Chief Technical Support
Attention: Teresa Eng
Canada-U.S. Income Tax Convention (the "Convention") Foreign Tax Credit-Canadian Resident and U.S. Citizen
This is in response to your verbal enquiry concerning the question as to what amount should be considered to be an "income or profits tax" for purposes of calculating the foreign tax credit ("FTC") in Canada for XXXXXXXXXX
The documents indicate the following facts.
1. U.S. Tax Payable before FTC under the Treaty
U.S. Source Can. Source XXXXXXXXXX U.K. Source Other Total U.S. Tax
2. U.S. Sourced Income
Dividend Income Interest Income Taxable Capital Gain XXXXXXXXXX Other Income Total U.S. Income
We have reviewed the documents which you provided to us and offer the following comments.
In order to determine the taxes for which Canada should grant a FTC, it is necessary to determine each source of income from the United States as in 2 above and determine whether the United States would have the right to tax such source of income if the resident of Canada were not a U.S. citizen and at what rate.
In accordance with paragraph 2 of Article XXIX (subject to paragraph 3) of the Convention the United States is permitted to tax its citizens as if there were no convention between Canada and the United States. In the case of United States citizens resident in Canada paragraph 5 of Article XXIV of the Convention provides that as long as the Income Tax Act provides a deduction in computing income for the portion of any foreign tax paid in respect to dividends, interest and royalties (i.e. subsection 20(11)) such deduction in Canada will not be reduced by any credit or deduction for income tax paid in computing the United States tax on such items of income. The taxpayer would be permitted to claim a subsection 20(11) deduction in the amount by which the United States taxes that would have been levied on such income before the credit for Canadian taxes discussed in the following paragraph exceeds 15% of such income and in the particular case the amount would be $XXXXXXXXXX Canada will also allow a deduction from Canadian tax but the tax deducted need not exceed 15 per cent of the gross amount of such items of income. Therefore, the maximum FTC for United States on dividends and interest is $XXXXXXXXXX
The United States is then required to give a credit for Canadian tax paid on such income against the amount of United States tax in excess of 15% of such income in accordance with paragraphs 5(c) and 6 of Article XXIV of the Convention.
In the case of income other than that set out immediately above, Canada is required to provide a foreign tax credit in accordance with paragraph 4 of Article XXIV of the Convention. For United States citizens that are resident in Canada that article provides that Canada shall allow a deduction from Canadian tax in respect of income taxes paid or accrued to the United States on such income which arises in the United States except that such deduction need not exceed the amount of tax that would be paid to the United States if the resident were not a U.S. citizen. Accordingly, in the above example, it is necessary to determine whether the United States has the right to tax the taxable capital gain or other income under the Convention and at what rate. If the capital gain was not derived from the alienation of real property, as defined in paragraph 3 of Article XIII of the Convention and paragraph 5 of Article XIII of the Convention does not apply, Canada would not be required to allow a FTC for United States taxes paid on the gain. If the capital gain is derived from the alienation of real property or paragraph 5 of Article XIII applies and if the other income is in fact "Other Income" for purposes of the Convention, Canada would be required to allow a FTC for the amount of the U.S. taxes that would be paid on such income before any credit that the United States may give against such taxes for Canadian taxes paid on such income. In the case of Canadian source income and of U.K. source income, Canada would not be required to allow a tax credit for any U.S. tax paid on such income.
The United States, without reducing its source basis tax (see example A in the Technical Explanation on paragraph 4 of Article XXIV of the Convention), would also allow a credit against U.S. tax for the income tax paid or accrued to Canada after Canada has allowed the deduction set out above. In the case of periodic pension payments, the United States would not reduce its tax below 15% (amount allowed by the Convention) of the gross amount of the pension payments. The credit allowed by the United States will not reduce the FTC allowed by Canada. However, where such credit is not applied for and the resulting tax paid to the United States is greater than that allowed by the Convention such excess tax is considered a voluntary payment and would not qualify as an "income or profits tax" for the purposes of the FTC.
From the information provided it is not clear that the figure of $XXXXXXXXXX claimed as a credit for "U.S. Foreign Tax Credit" was computed taking into account the views expressed above except for those concerning the United States sourced dividend and interest income.
XXXXXXXXXX
We trust these comments are adequate for your purposes and as requested, we are attaching the documents you submitted.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch