Dear Sirs:
This is in reply to your letter of October 23, 1990 in which you requested that we elaborate on our position with respect to the income received by a Canadian resident individual from a U.S. subchapter "S" corporation as outlined in our letter of October 15, 1990.
As we understand it, your further concern is with respect to tax on other U.S. sourced investment income received directly by the Canadian resident from investments mate outside of the "S" corporation which becomes taxable at rates in excess of the 15% non-resident withholding tax otherwise levied under the Canada-U.S. Income Tax Convention (the Convention) as a result of an election made by the Canadian resident individual pursuant to U.S. tax law to bo taxed as though he were a U.S. resident alien. You asked whether the excess U.S. taxes paid on this income are creditable and/or deductible for Canadian tax purposes.
Given that such investment income is not earned by the "S" corporation and that the individual would have dual resident status, it is our opinion that in such circumstances the Convention should apply and the amount of taxes creditable for purposes of section 126 and/or deductible for purposes of subsection 20(11) and (12) of the Income Tax Act would be limited to the maximum rate provided by the treaty.
With respect to the income earned by the subchapter "S" corporation which is distributed to a Canadian resident shareholder, the general comments contained in our letter of October 15, 1990 are applicable.
We trust that our response is satisfactory.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch