Principal Issues: Whether a subsection 20(11) deduction is available to an individual in respect of US tax paid on their share of income earned by a US LLC?
Position: Yes, if the individual received a distribution in the year from the LLC. Otherwise, no.
Reasons: In computing the individual'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 individual exceeds 15% of the amount of the dividend income included in computing the individual's income for the year from the LLC.
2013 STEP CANADA ROUNDTABLE, June 10&11, 2013
QUESTION 13. US LLCs and Subsection 20(11)
Subsection 20(11) provides for the deduction of certain foreign taxes paid in the computation of an individual's income from a property. Specifically, an individual may deduct under subsection 20(11) the portion, if any, of the foreign tax that exceeds 15% of the gross income included in income for the year from the particular property. The computation in subsection 20(11) is made on a property-by-property basis. It looks specifically at the income from a particular property and the foreign income or profits tax paid in respect of that income to determine whether the 15% limitation has been exceeded.
Where an LLC resident in the US is a flow-through entity for US purposes, US tax is paid on the income of the LLC by the owners of the LLC and not by the LLC itself. This tax is payable by the owners if the LLC has income regardless of whether any distributions are received from the LLC. Therefore, is it right to conclude that such US tax paid by an individual resident in Canada (a "taxpayer") is not paid in respect of a distribution from the LLC that has been included in computing the taxpayer's income for the year such that subsection 20(11) can never apply in these circumstances?
CRA Response
For the purpose of this question, it is assumed that the LLC is treated as a corporation for Canadian tax purposes and that it is not a controlled foreign affiliate of the taxpayer. The "amount" referred to in paragraphs (a) and (b) of subsection 20(11) is the amount, if any, which has been included in computing the taxpayer's income for the year in respect of a distribution from the LLC. If no distribution has been made in the year by the LLC to the taxpayer, there would be no such amount. Therefore, no part of the US tax paid by the taxpayer would be deductible by virtue of subsection 20(11), however, it would be deductible pursuant to subsection 20(12). To the extent the tax was not deducted under subsection 20(12), the tax would be creditable for purposes of subsection 126(1).
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. It should be noted that the US tax paid by the taxpayer which is eligible for a foreign tax credit under subsection 126(1) does not include the US tax paid that was deductible by virtue of subsection 20(11), regardless of whether it was in fact deducted.
2013-048037
LM Carruthers