A CCPC (the “Corporation”) derives its income for a taxation year from property situated in Canada and from a business carried on in Canada (the generation of intangible property) that generates foreign royalties on which it pays tax to a foreign government. Such foreign tax paid does not qualify for the foreign business income tax credit under s. 126(2) since such business income is not considered to be income from a business carried on outside Canada, and instead entitles the CCPC to the s. 126(1) credit.
CRA confirmed that this foreign tax credit in respect of the Corporation’ Canadian business income reduced its refundable dividend tax on hand ("RDTOH") under (former) s. 129(3)(a)(i)(A) and thus caused the CCPC’s Canadian property income to be subject to a higher rate of Canadian tax than it would otherwise be.
CRA went on to state:
[A] different result could be obtained if the Corporation claimed a deduction under subsection 20(12) in computing its business income for the particular taxation year of an amount not exceeding the Foreign Tax it would have paid for the year. … [A]ny amount so deducted by the Corporation would reduce the Foreign Tax Credit under subsection 126(1) and thus no longer affect the calculation of its RDTOH.