14 February 1990 External T.I. 74715 F - Foreign Tax Deduction

As requested, attached is a copy of the September 11, 1975 letter to 24(1) as well as their letter to the Department.

ChiefCorporate Reorganizations II SectionReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch

Dear Sir:

This is in reply to your letter of August 7, 1975 concerning a foreign tax deduction under paragraph 126(1)(a).

The example in your letter concerns the redemption of preference shares of a United States resident company (in this case a foreign affiliate of a Canadian corporation) at par value which can, in certain circumstances give rise in a deemed dividend for United States purposes.  You indicate that, the Canadian shareholder is subject to a 15% United States withholding tax on the amount of that deemed dividend.

You contend that the word "income" in the exception in paragraph 126(1)(a) must be read as meaning income for purposes of the Canadian Income Tax Act and that, since the redemption of the preference shares of the foreign affiliate does not create "income" for Canadian purposes the exception does not apply and the foreign withholding taxes levied in respect of the amount paid on redemption is available to the Canadian taxpayer as a non-business income tax for foreign tax credit purposes.  It is our view that, the exception in paragraph 125(1)(a) is, as you suggest, not applicable where the tax paid is in respect of an amount nor included in the taxpayers income under the Act.

Consequently, the foreign withholding tax levied in the case you describe could be a non-business income tax and would, subject to the other restrictions of subsection 126(1), be available for a foreign tax deduction.

We trust that the above will be of assistance.

for Director,Technical Interpretations Division