Principal Issues
Position
A foreign tax credit may be claimed under subsection 126(1) of the Income Tax Act (the “Act”) in respect of U.S. tax paid on the capital gain, provided such tax qualifies as non-business-income tax.
The amount of the credit is subject to the limitations prescribed under section 126 and cannot exceed the Canadian tax otherwise payable on the foreign-source income.
Reasons
A Canadian resident is subject to tax in Canada on worldwide income, including gains realized on the disposition of real property situated outside Canada.
Where a capital gain arises from U.S. real property, the United States retains the right to tax such gain under Article XIII of the Canada–U.S. Tax Convention, and Canada is required to provide relief from double taxation.
The amount of U.S. tax paid, after applicable U.S. credits, may be considered non-business-income tax within the meaning of subsection 126(7), provided it represents a final tax liability.
The foreign tax credit is computed using Form T2209, and is limited to the portion of Canadian tax otherwise payable on the taxable capital gain derived from the foreign source.
For purposes of this computation, the relevant income included in the foreign tax credit formula is the taxable capital gain, as determined under Canadian tax rules, rather than the full capital gain.
Where foreign taxes paid exceed the amount allowable under the foreign tax credit limitation, the excess foreign tax is not deductible under subsection 20(12) where it relates to capital gains, and cannot be treated as an outlay or expense in computing the capital gain.
Additionally, foreign taxes must be claimed in the year in which they are paid, and cannot be carried forward or applied to subsequent years in respect of the same disposition.
Limitations
The availability and computation of the foreign tax credit depend on the specific facts, including the nature of the property, the amount of foreign tax paid, and applicable treaty provisions.
These comments represent general interpretations and do not constitute binding rulings.
Binding confirmation may only be obtained through an advance income tax ruling request submitted in accordance with CRA administrative procedures.
