2014-0546571E5 Foreign Tax Credit

Principal Issues: Whether a foreign tax credit can be claimed under subsection 126(1) of the Act by a taxpayer, a Canadian resident individual and a shareholder of a South African company, in respect of the Secondary Tax on Companies paid by such company in connection with the dividends paid to the taxpayer.

Position: No.

Reasons: Any foreign non-business income tax must be paid by the taxpayer in order for the taxpayer to be entitled to a tax credit under subsection 126(1).

Author: Ho, Judy
Section: 126(1)

XXXXXXXXXX                                2014-054657
                                                        Judy Ho
                                                        (416) 973-0020

July 23, 2015

Dear XXXXXXXXXX:

Re:   Foreign Tax Credit

We are writing in response to your email dated September 15, 2014 in which you requested our view as to whether a Canadian resident individual (the “Taxpayer”) can claim a foreign tax credit under section 126 of the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.) as amended (the “Act”), on his/her Canadian income tax return in respect of the Secondary Tax on Companies (“STC”) paid to the government of South Africa by a South African resident company (the “Company”) of which the Taxpayer is a shareholder, in connection with a dividend paid by the Company to the Taxpayer.

As you describe in your email, dividends paid from a South African resident company to a non-resident of South Africa prior to April 1, 2012 were not subject to withholding taxes. Rather, such company was subject to the STC. Effective October 1, 2007, the STC was levied at a rate of 10% of the net amount of dividends declared by the South African company to the non-resident. Commencing April 1, 2012, the STC regime in South Africa was abolished and replaced with a withholding tax regime, whereby the South African payor company must withhold 15% on dividends paid to shareholders who are non-residents of South Africa.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations. Subsection 126(1) of the Act provides that a Canadian-resident taxpayer may deduct from the tax for the year otherwise payable under Part I of the Act by the taxpayer, an amount equal to such part of any non-business-income tax paid by the taxpayer for the year to the government of a country other than Canada as the taxpayer may claim, subject to the limitations described in paragraph 126(1)(b) of the Act. Since the STC is a tax levied on a South African company that paid the dividend, the requirement that the tax be paid by the taxpayer (i.e., the Canadian-resident recipient of the dividend) is not met.

As a result, since in the situation described in your email, the STC is not paid by the Taxpayer, the Taxpayer will not be able to claim a foreign tax credit under subsection 126(1) of the Act for any STC paid by the Company in respect of any dividends paid to the Taxpayer. 

We trust our comments will be of assistance.

Yours truly,

Vitaliy Anissimov
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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