CRA finds that the US excise tax on parachute payments is not an income tax

The taxpayer was subject to tax levied under §4999 of the Internal Revenue Code (IRC), on an excess parachute payment, i.e., compensation over a base amount paid to an employee or independent contractor on a change in control.

In finding that this tax did not qualify as “an income or profits tax” for foreign tax credit purposes, CRA stated:

T]he excise tax was essentially added to discourage the use of excess parachute payments, not as a subordinate measure that is part of a comprehensive income tax regime since that income is already taxed under the regular income tax regime of the IRC.

CRA also found that the §4999 tax did not qualify as a tax covered by Art. II(2)(b) of the Canada-U.S. Income Tax Convention (i.e., it was not a federal income tax or a substantially similar tax), so that Canada was not required to provide a credit for such tax pursuant to Art. XXIV(2)(a)(i) of such Convention.

Neal Armstrong. Summaries of 2 September 2025 External T.I. 2022-0945251E5 under s. 126(7) – non-business income tax, and Treaties - Income Tax Conventions – Art. 2.