US tax is paid on the income of an LLC by an individual resident in Canada to which the LLC is not a controlled foreign affiliate (so that its income is not FAPI). As this tax is independent of whether there is any distribution from the LLC that has been included in computing the taxpayer's income for the year, should it be concluded that s. 20(11) can never apply in these circumstances as the U.S. tax is not paid "in respect of" the individual's income?
In responding, CRA first noted that if no distribution were made in the year by the LLC, there would be no amount included in the individual's income so that: the US tax paid by the taxpayer would be deductible under s. 20(12) and not under s. 20(11); and that to the extent the tax was not deducted under s. 20(12), it would be creditable for purposes of s. 126(1). CRA then stated:
On the other hand, in a year that the taxpayer receives a distribution from the LLC there would be an amount of dividend income included in computing the taxpayer's income for the year from the LLC. In our view the words "tax paid as may reasonably be regarded as having been paid in respect of" in paragraph 20(11)(a) are broad enough to connect a US tax computed on the profits of the LLC to the dividend from the LLC. Therefore, in computing the taxpayer's income from the shares of the LLC, there may be deducted under subsection 20(11) the amount, if any, by which the amount of the US tax paid by the taxpayer exceeds 15% of the amount of such dividend income.