13 August 2009 External T.I. 2009-0320581E5 - Subsections 20(11) and 20(12)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Example of deductions made under subsections 20(11) and 20(12).

Position: General comments.

Reasons: N/A

XXXXXXXXXX 2009-032058

S. Leung, C.A.

August 13, 2009

Dear XXXXXXXXXX :

Re: Subsections 20(11) and 20(12) of the Income Tax Act (the "Act")

We are writing in reply to your letter of May 1, 2009 and as a result of our telephone conversation (XXXXXXXXXX /Leung) on July 6, 2009. During the telephone conversation you requested that we show you an example of how the deductions under subsections 20(11) and 20(12) of the Act are computed where foreign income taxes have been paid in respect of foreign source dividends and interest received by a taxpayer. You asked us to assume that an individual taxpayer is a resident of Canada for the purposes of the Canada-Germany Income Tax Convention (the "German Convention") who received dividends of $1,000 and interest of $1,000 from Germany and that German income taxes in the amounts of $150 and $200 were withheld in Germany on the dividends and interest, respectively. All figures are in Canadian currency.

Our Comments

Subsection 20(11) of the Act operates to allow a deduction equal to the amount by which such part of the income or profits tax paid by an individual taxpayer to a country other than Canada (i.e. foreign income tax) for the year in respect of an amount that has been included in computing the income of the taxpayer for the year from property (on a property by property basis, i.e., in this case, a separate subsection 20(11) calculation would be made in respect of the dividends and the interest) exceeds 15% of the amount of such income so included.

In the assumed facts above, 15% of the amount of the dividends is $150 and the German tax withheld on the dividends is $150. Hence, there is no subsection 20(11) deduction in respect of the dividends because foreign tax paid of $150 does not exceed 15% of the amount of dividends which is also $150. With respect to the interest income, 15% of the amount of interest is $150 but the German tax withheld is $200. Hence, there is a subsection 20(11) deduction of $50 (i.e., $200 minus $150) in respect of the interest income. Consequently, the balance of the German tax paid of $300 (i.e., total German taxes withheld of $350 minus the subsection 20(11) deduction of $50) could be either deducted under subsection 20(12) of the Act or claimed as a foreign tax credit under subsection 126(1) of the Act or a combination of both. However, the amount of the subsection 20(11) or 20(12) deduction would reduce the amount of the foreign source income for the purposes of computing any foreign tax credit. For more details about the deductions under subsections 20(11) and 20(12) of the Act, please refer to Interpretation Bulletin IT-506, dated January 5, 1987, which can be obtained through the following website: www.cra-arc.gc.ca/E/pub/tp/it506/it506-e.html.

A further complication may arise as a result of the operation of the German Convention. Under Articles 10(2)(b) and 11(2) of the German Convention, Germany is prohibited from taxing a Canadian resident taxpayer at a rate in excess of 15% on the dividends and 10% on the interest, respectively. Hence, the amount of German tax in respect of the dividends cannot exceed $150 and in respect of the interest $100. Therefore, the total German tax should be $250 instead of $350. The taxpayer can therefore apply for a tax refund of $100 from Germany. Such amount of $100 which is not obliged to be paid by the taxpayer as income tax to Germany, would not be considered to be an income or profit tax for Canadian tax purposes and is thus not eligible for a deduction under subsection 20(11) or 20(12) or a foreign tax credit under subsection 126(1) of the Act. This is so because the excess is considered refundable to the taxpayer. In other words, the amount of the tax that the taxpayer should have paid to Germany in respect of the dividends should have been $150 and in respect of the interest should have been $100 pursuant to the German Convention. Since the German tax that the taxpayer should have paid in respect of each of the dividends and interest is equal to or less than 15% of such dividends or interest, subsection 20(11) of the Act would not be applicable in this case. The total German tax of $250 (i.e., after the German tax refund of $100) that is considered to be income or profits tax for Canadian tax purposes would be either deductible under subsection 20(12) or eligible for a foreign tax credit under subsection 126(1) of the Act.

We trust you will find the above satisfactory. If you require further clarification, please do not hesitate to contact Simon Leung at 613-952-4666.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Revenue Agency.

Yours truly,

Olli Laurikainen, C.A.

Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch