Ontario Foreign Tax Credit and Deduction

Bulletin
Information Notice
Tax Tip
Published:  
Content last reviewed: December 1899
ISSN:
ISBN: (Print), (PDF), (HTML)

Publication Archived

Notice to the reader: Effective January 1, 2009, the Canada Revenue Agency (CRA) administers Ontario's corporate income tax, capital tax, corporate minimum tax, and the special additional tax on life insurers.

As a result, the Corporations Tax Act provisions described on this page and in other publications are only applicable to taxation years ending December 31, 2008 and prior.

For taxation years beginning January 1, 2009, the Taxation Act rules apply.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.

References: subsection 39, 40 and 57.8, subsection 11(12), 34(7)

Application

This bulletin replaces Interpretation Bulletin L-1 originally published July 4, 1977 and is updated for current legislative references and for information from former Information Bulletins 10-78R, 15-79, 21-81, 2738, 2739 and 2741.

The bulletin sets out the policy of the Corporations Tax Branch for the Ontario foreign tax credit and the deduction for foreign taxes. It is provided as a guide to taxpayers and is not intended as a substitute for the legislation. References to legislation are to the provisions of the Corporations Tax Act (Ontario) (CTA) and its Regulations, unless otherwise noted.

Introduction

  1. Section 40 provides a tax credit which may be deducted from Ontario corporations income tax payable, for tax paid to a jurisdiction outside Canada on investment income earned in that jurisdiction.
  2. Section 57.8 permits the same tax credit to be deducted from corporate minimum tax.
  3. Ontario provides a foreign tax credit on foreign investment income only whereas foreign tax credits are available at the federal level on both foreign investment income and foreign business income.
  4. A deduction from income may also be claimed. The deduction for "non-business income tax" made under subsection 20(12) of the Income Tax Act (Canada) (ITA) can be made for Ontario purposes but is limited by subsection 11(12) to the amount that has not been claimed for the federal tax credit under subsection 126(1) of the ITA.

Foreign Investment Income - Subsection 40(1)

  1. The Ontario foreign tax credit applies only to investment income that:
    • is sourced from jurisdictions outside Canada
    • has not been included in "gross revenue" attributed to a jurisdiction outside Ontario in the income allocation formula for section 39, and
    • qualifies for a foreign tax credit under the ITA.
  2. Investment income means:
    • interest (e.g., interest on loans and advances)
    • dividends (e.g., dividends from preferred shares)
    • rents and royalties from property situated in a foreign jurisdiction, and
    • taxable capital gains in a foreign jurisdiction less allowable capital losses there.

Banks' Foreign Investment Income - Subclause 40(1)(c)(iii), Subsection 40(4)

  1. Banks are not allowed an Ontario foreign tax credit in respect of investment income derived from foreign loans and deposits where the loans and deposits have been attributed to a foreign jurisdiction in the income allocation formula for section 39.
  2. In addition, banks cannot claim the Ontario foreign tax credit in respect of income from an "eligible loan" earned by the international banking centre business of the bank. "Eligible loan" is defined in section 33.1 of the ITA.

Tax Sparing and Reducing Tax Credit Wastage

Tax Sparing

  1. To encourage investments in their countries, some foreign governments forgive all or part of the taxes that would normally be paid by a corporation. This practice is known as tax sparing.
  2. Under certain international tax agreements and conventions, the federal government has agreed to consider spared taxes as having been paid for purposes of calculating foreign tax deductions and credits under the ITA.
  3. For tax agreements and conventions that are prescribed by Ontario, Ontario also considers spared taxes to have been paid for purposes of calculating the Ontario foreign tax deduction under subsection 11(12) and credits under sections 40 and 57.8.
  4. Section 802 of Regulation 183 prescribes the applicable agreements and conventions. The effective date is the date each agreement or convention came into force.

Reducing Foreign Tax Credit Wastage by Increasing Taxable Income

  1. Section 110.5 of the ITA allows a corporation to increase its "taxable income otherwise determined for the taxation year" in order to increase foreign tax credit claims. The amount added to taxable income is also added to the corporation's non-capital loss which may be carried over to other taxation years.
  2. Subsection 34(7) requires that the amount added to federal taxable income and non-capital loss must also be added to the Ontario taxable income and the Ontario non-capital loss for the same taxation year.
  3. In a taxation year where a corporation does not have any Ontario taxable income but has instead a non-capital loss, consistent with the definition for taxable income in subsection 248(1) of the ITA, the corporation's taxable income prior to the section 110.5 addition is nil. As a result, the corporation must report Ontario taxable income equal to the section 110.5 addition.
  4. Furthermore, the Ontario taxable income resulting from section 110.5 of the ITA cannot be reduced by applying losses of other taxation years.

Calculation

  1. The Ontario foreign tax credit is calculated as follows:

    1. Multiply the foreign investment income by the Ontario income tax rate for the year, then by the percentage of taxable income allocated to Ontario for the year.
    2. Subtract from the foreign tax paid on foreign investment income the greater of
      • the foreign tax on foreign investment income deducted in computing net income under subsection 20(12) of the ITA, and
      • the foreign tax deducted in computing income under subsection 11(12). Then multiply the net amount by the percentage of taxable income allocated to Ontario.
    3. Multiply the foreign tax credit on foreign investment income allowed at the federal level by the percentage of taxable income allocated to Ontario.
    4. Subtract the amount arrived at in Step 3 from the amount arrived at in Step 2.
    5. Take the lesser of the amounts determined under Step 1 and Step 4. This is the Ontario foreign tax credit.

    For an example showing the calculation of the Ontario foreign tax credit, refer to paragraph 19.

Notes About the Calculation

  1. A separate calculation is required for each foreign country for which a tax credit is claimed.
  2. The foreign tax credit allowed at the federal level, i.e. in step 3 above, means the amount that the corporation is entitled to claim, not just the amount actually claimed at the federal level.
  3. No Ontario foreign tax credit is allowed where a corporation has claimed or is entitled to claim a tax credit at the federal level for the full amount of foreign taxes paid.

An Example

Assumptions

  1. The assumptions made for the example are:
    • X Co. Ltd. is an Ontario public corporation with permanent establishments in Ontario and Quebec
    • its taxable income is allocated 60% to Ontario and 40% to Quebec
    • in the taxation year ended December 31, 2002, X Co. earns taxable income of $1,700,000 from Canadian sources and $20,000 from foreign source investments
    • X Co. pays federal income tax of 26.12% on its Canadian source income and 36.12% on its foreign source investment income
    • the company pays Ontario income tax of 12.5%
    • the company does not deduct any foreign tax paid from its taxable income.

Two Scenarios

  1. Two scenarios are presented:
    • in scenario 1, X Co. pays foreign tax of $5,000, or 25% of its foreign investment income. X Co. recovers all of the foreign tax paid by receiving an assumed federal foreign tax credit of $5,000
    • in scenario 2, X Co. pays foreign tax of $9,000, or 45% of its foreign investment income.

      The company receives an assumed federal foreign tax credit of $5,247.

The Ontario Foreign Tax Credit for Scenario 1

  1. Using the steps for calculating the Ontario foreign tax credit in paragraph 17, the tax credit for scenario 1 is:
     
    Step Explanation Amount
    1 Ontario income tax on the foreign investment income:
    12.5% × 60% × $20,000
    $1,500
    2 Net foreign tax attributable to Ontario:
    60% × ($5,000 − $0)
    $3,000
    3 Federal foreign tax credit attributable to Ontario:
    60% × $5,000
    $3,000
    4 Amount in Step 2 minus amount in Step 3:
    $3,000 − $3,000
    $ NIL
    5 Ontario Foreign Tax Credit:
    Lesser of amounts in Step 1 and Step 4
    $ NIL

The Ontario Foreign Tax Credit for Scenario 2

  1. Using the steps for calculating the Ontario foreign tax credit in paragraph 17, the tax credit for scenario 2 is:
     
    Step Explanation Amount
    1 Ontario income tax on the foreign investment income:
    12.5% × 60% × $20,000
    $1,500
    2 Net foreign tax attributable to Ontario:
    60% × ($9,000 − $0)
    $5,400
    3 Federal foreign tax credit attributable to Ontario:
    60% × $5,247
    $3,148
    4 Amount in Step 2 minus amount in Step 3:
    $5,400 − $3,148
    $2,252
    5 Ontario Foreign Tax Credit:
    Lesser of amounts in Step 1 and Step 4
    $1,500