Chapter History S5-F2-C1, Foreign Tax Credit

Introduction

The purpose of this Chapter History page is to highlight any amendments to the information contained in an interpretation bulletin that is now reflected in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Update December 1, 2015

Minor changes have been made to improve the usability of the income tax folios:

• the Summary section has been moved to the top of each folio chapter to be more immediately visible and helpful to readers;
• the Application and Reference sections have been moved to the end of the Chapter which is more appropriate for administrative content of this nature.  However, these sections now appear in the Table of contents for easy access;
• the statement that folios are only available in electronic format has been moved to the end of the Application section; and
• the words “as promulgated under the Act” in connection with the Income Tax Regulations have been removed from the Application section, in the interest of using plain language.

Update February 6, 2014

Throughout the French version of the Chapter and its Chapter History, general revisions have been made to improve readability. The following changes have also been made to the Chapter.

The fifth paragraph of the Summary was modified to improve readability by replacing the word “third” with the word “further” in the first sentence.

¶1.3 has been modified for clarity by inserting the word “foreign” before the expression “business-income taxes” in the second sentence and by including a hyphen between the words “business” and “income”.

¶1.4 Abbreviations and definitions used: In the French version of the chapter, a separate definition for the expression “pays étranger de l’entreprise” has been removed. The translation of the English expression “foreign business country” being inappropriate, a separate defined phrase was determined to be unnecessary in the French version.

¶1.12.1 has been added to describe in what circumstances the CRA would consider a foreign tax levied on gross revenue to be an income or profits tax.

¶1.23 has been revised by removing the unnecessary reference to ¶1.74.

¶1.27 has been revised to include a description of how S Corps are taxed for US purposes.

¶1.29 and 1.30 have been modified for clarity by replacing the references to “FBI” and “FNBI” with references to “BIT” and “NBIT”, respectively.

¶1.31 has been modified for clarity by replacing the words “sets out the deemed dispositions which are not considered” with the words “provides that certain dispositions and acquisitions of property that are either deemed to be made by certain provisions of the Act or made in the course of certain rollover transactions are not dispositions or acquisitions”.

¶1.39 has been modified to improve readability by adding the words “paid by the partnership” immediately after the words “of the total foreign taxes” in the third sentence.

¶1.39.1 has been added to take into account the rules regarding artificial foreign tax credits generators under subsections 126(4.11) to (4.13) as enacted by S.C. 2013, c. 34 (formerly Bill C-48), s. 267(4). Subsections 126(4.11) to (4.13) apply for tax years ending after March 4, 2010, with specific exceptions for tax years ending on or before August 27, 2010.

¶1.41 has been modified for readability by replacing the words “apportioned based on the relationship of each individual’s respective foreign incomes that gave rise to the foreign tax” with the words “allocated to each such individual in the proportion that such individual’s respective foreign income is of all the income that gave rise to the foreign tax” in the second sentence.

¶1.44 has been revised to take into account rules regarding foreign exchange gains or losses under subsections 39(1.1) to 39(2.1) as enacted by S.C. 2013, c. 34 (formerly Bill C-48), s.59(1). Subsections 39(1.1) and 39(2) apply, in determining the capital gain or capital loss of a foreign affiliate of a taxpayer, in respect of tax years of the foreign affiliate that end after August 19, 2011, except that, if the taxpayer has elected under paragraph 95(2)(f.11), subsections 39(1.1) and 39(2) apply in respect of tax years of all foreign affiliates of the taxpayer that end after June 2011. In any other case, they apply in respect of gains made and losses sustained in tax years that begin after August 19, 2011. Subsection 39(2.1) applies in respect of the portions of loans received and indebtedness incurred on or before August 19, 2011 that remain outstanding on that date and that are repaid, in whole or in part, on or before August 19, 2016.

¶1.48.1 has been added to take into account the rules under paragraph 126(6)(d) for the purposes of the definition of qualifying income in subsection 126(7) as enacted by S.C. 2013, c. 34 (formerly Bill C-48), s.267(8). Subsection 126(6) applies to dispositions and acquisitions that occur after 1998, except that, in applying paragraph 126(4.4)(a) of the Act, to dispositions and acquisitions that occur before June 28, 1999, that paragraph is to be read without reference to “10(12) or (13), 14(14) or (15), or”.

¶1.53 has been revised to now make reference to intangible or incorporeal property and personal or movable property to reflect the bijural application of the Act.

¶1.60 has been revised to now make reference to tangible or corporeal property to reflect the bijural application of the Act.

¶1.71 has been modified for consistency by making use of the defined terms of “BIT” and “NBIT”. The paragraph has also been modified for readability by communicating the requirement to add two amounts together (BITs and NBITs) by using the word “plus” rather than the words “total” and “and”.

1.74 has been modified for clarity by replacing the references to “taxable capital gains” with references to “capital gains” in the second sentence.

¶1.101 has been revised to reflect the correct cross-reference to ¶1.75. The paragraph has also been modified to improve readability by replacing the opening words of “If a taxpayer deducts an amount from their income, as a foreign tax credit for a particular year” with the words “If a taxpayer deducts, from their tax otherwise payable for a particular year, an amount as a foreign tax credit for the year”.

Update March 28, 2013 

General

Income Tax Folio S5-F2-C1, Foreign Tax Credit consolidates, replaces, and cancels Interpretation Bulletin IT-270R3, Foreign Tax Credit, Interpretation Bulletin IT-395R2, Foreign Tax Credit – Foreign-Source Capital Gains and Losses, and Interpretation Bulletin IT-520 (consolidated), Unused Foreign Tax Credits – Carryforward and Carryback.

In addition to consolidating the content of the former interpretation bulletins, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletins are described below. Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended.

Legislative and other changes

Throughout the chapter, references to real property have been changed to real or immovable property to reflect pending amendments respecting the bijural application of the Act.

¶1.4 (formerly included in ¶1, 2, and 37 of IT-270R3) has been revised to change the phrase the applicable to a particular to reflect the country by country method of determining foreign tax credits.

¶1.5 (formerly included in ¶4 of IT-270R3) now includes a new reference to user fees, and regulatory charges which were added to bring the examples in line with current jurisprudence concerning what is a tax. The reference to resource royalties was removed from the discussion of taxes in general since they may be a payment for a specific right or privilege, or may be part of a regulatory scheme and moved to the discussion of examples of what will not be considered an income or profits tax, to address the situation where they may be structured as a tax.

¶1.6 (formerly included in ¶5 of IT-270R3) now includes an additional bullet to reflect the operation of subsection 126(4).

¶1.7 (formerly included in ¶5 of IT-270R3) has been revised to reflect the primacy of Canadian law for characterizing a transaction, and calculating the income for the purposes granting a foreign tax credit in accordance with the language of section 126.

¶1.9 (formerly included in ¶5 of IT-270R3) now includes a reference to documentary or stamp taxes in the examples of items not considered to be income or profits taxes in consideration of the CRA’s position on the general nature of these taxes.

¶1.10 (formerly included in ¶5 of IT-270R3) has been revised to change business income to net business income in the first sentence for greater clarity.

¶1.16 (formerly included in ¶7 of IT-270R3) now includes an example describing a taxpayer with different taxing and business countries.

¶1.25 (formerly included in ¶8 of IT-270R3) has been reworded to remove ambiguity as to whether foreign was meant to describe the other person or partnership and to better reflect paragraph ( e ) of the definition of non-business-income tax in subsection 126(7).

¶1.26 (formerly included in ¶8 of IT-270R3) now includes a reference to the amendments to the overseas employment tax credit contained in the Jobs and Growth Act, 2012; edited to remove redundancy.

¶1.29 - 1.31 are new additions which replace and expand on the parenthetical comment in ¶8 of IT-270R3, which read: (subject to subsections 126(4.1) and (4.2), which concern the no economic profit and short-term security acquisitions rules, respectively)

¶1.32 - 1.35 (formerly included in ¶11 of IT-270R3) has been revised to omit the last sentence of former ¶11 and to add a discussion on what is meant by paid by the taxpayer for the year.

¶1.39 replaces and expands on the partnership information contained within parenthesis at ¶1 - 2 of IT-270R3.

¶1.41 (formerly included in ¶15 of IT-270R3) has been revised to de-emphasize the word spouse and place greater emphasis on the filing of a valid, foreign, communal return.

¶1.42 (formerly included in ¶16 of IT-270R3) has been expanded to reflect amendments to section 261 and the CRA’s position regarding consistency in exchange rate methodologies.

¶1.46 (formerly included in ¶20 of IT-270R3) has been revised to clarify the situation of income arising from property which pertains to or is incidental to a foreign business.

¶1.49 (formerly included in ¶21 of IT-270R3) now references the Canada-UK Income Tax Convention.

¶1.51 (formerly included in ¶22 of IT-270R3) now contains a sentence to address subsection 91(5).

¶1.52 is a new paragraph added to point out that where a treaty is applicable; the treaty may have its own income sourcing rules which supersede those of the Act, but only for the purposes of eliminating double taxation in accordance with the treaty.

¶1.53 (formerly included in ¶23 of IT-270R3) now includes the phrase or profit generating activities for greater clarity, as well as a bullet referencing transportation or shipping businesses.

¶1.54 is a new paragraph added to reflect the jurisprudence on additional factors and the weighting of various factors when determining the location of the source of the business income.

¶1.57 (formerly included in ¶25 of IT-270R3) has been revised to change place to physical place to remove ambiguity.

¶1.58 (formerly included in ¶26 of IT-270R3) contains new sentences that reflect additional factors concerning the situs of income and their weight, as judicially addressed.

¶1.62 (formerly included in ¶3 of IT-395R2) has been revised to add and title was transferred to the second sentence and to add the third sentence for greater clarity.

¶1.63 (formerly included in ¶3 of IT-395R2) has been revised to add the phrase under the Act to remove ambiguity and to differentiate between foreign deemed dispositions and deemed dispositions under domestic law.

¶1.65 (formerly included in ¶4 of IT-395R2) now includes examples and a discussion of the relative weighting of various factors for consideration.

¶1.69 is a new paragraph added to address TFSAs and RRSPs.

¶1.70 - 1.72 (formerly included in ¶37 of IT-270R3) has been revised to reflect legislative changes effective for the 2005 and later tax years, to make reference to the additional definitions involved, and to reference Guide 5000-G , General Income Tax and Benefit Guide.

¶1.73 (formerly included in ¶40 of IT-270R3) has been revised to change the treaty in the example to the Canada-India Treaty.

¶1.76 (formerly included in ¶2 of IT-270R3) has been revised to match the marginal note of subsection 120(1).

¶1.79 (formerly included in ¶3 of IT-270R3) has been expanded to better explain the operation of section 114 and subparagraphs 126(1)( b )(ii) and 126(2.1)( a )(ii).

¶1.80 (formerly included in ¶30 of IT-270R3) now includes the phrase not under the laws of the foreign jurisdiction in the first paragraph for greater clarity. It was also revised to mention both mandatory and permissive deductions to reflect previous CRA positions regarding deductions and section 126.

¶1.83 (formerly included in ¶31 of IT-270R3) has been revised to add the second sentence to reflect previously published CRA guidance.

¶1.85 (formerly included in ¶33 of IT-270R3) has been revised to remove the word shall to reflect proposed amendments to subsection 4(3) the Act as introduced by the Department of Finance on July 16, 2010.

¶1.89 (formerly included in ¶5 of IT-395R2) replaces the first two sentences in old ¶5 to better reflect the operation of subclause 126(1)( b )(ii)(A)(III) and the definition of non-business income tax in subsection 126(7) as well as previously published CRA guidance.

¶1.90 (formerly included in ¶6 of IT-395R2) has been revised to add the words from other tax years for greater clarity.

¶1.94 (formerly included in ¶38 of IT-270R3) expands on the operation of section 110.5 and reflects previously published CRA guidance.

¶1.97 (formerly included in ¶39 of IT-270R3) has been revised to add a reference to Competent Authority Services.

¶1.98 (formerly included in ¶1 of IT-520(cons)) has been updated to reflect amendments to the Act changing the carryforward limit.

¶1.99 (formerly included in ¶2 of IT-520(cons)) has been revised to add the parenthetical explanation (that is, calculated on a country-by-country and year-by-year basis).

¶1.101 is a new paragraph to address the loss of carry forward amounts by virtue of the definition of unused foreign tax credit.

¶1.102 (formerly included in ¶3 of IT-520(cons)) has been updated to reflect amendments to the Act changing the carryforward limit.

¶1.103 (formerly included in ¶4 of IT-520(cons)) has been revised to include references to forms for non-corporate taxpayers.

¶1.104 (formerly included in ¶5 of IT-520(cons)) has been updated to reflect amendments to the Act changing the carryforward limit.

¶1.105 - 1.106 (formerly included in ¶6 of IT-520(cons)) has been updated to reflect amendments to the Act changing the carryforward limit.