CRA provides general guidelines on how to allocate foreign tax to a short Canadian tax year for FTC purposes

A CCPC (“Canadian Target”), which previously had a calendar taxation year, loses its CCPC status on May 1 as a result of an arm’s length US corporation (“US Buyer”) agreeing with it that it will cause a Canadian subsidiary of US Buyer (“US Buyer Sub”) to purchase its shares, thereby causing the “First Stub Year” to end pursuant to s. 249(3.1). That purchase occurring on 11:06 am on November 30 causes the ‘Second Stub Year” to end pursuant to ss. 249(4)(a) and 256(9). Moments before the end of the Second Stub Year, Canadian Target realizes a gain that is subject to FIRPTA tax as a result of closing the sale to US Buyer of its US subsidiary (“US Target”), which continues to have a calendar taxation year.

In order for an FTC to be available to Canadian Target pursuant to s. 126(1), the U.S. tax paid needs to be “for the year” in which the credit is claimed. CRA indicated that the relevant question here was how the foreign tax should reasonably be allocated among the Canadian taxation years that overlapped with the foreign fiscal period.

Here, as Canadian Target’s only U.S. tax liability was attributable to the capital gain realized immediately prior to 11:06 am on November 30, and that gain fell within Canadian Target’s Second Stub Year, it appeared reasonable to allocate all of the U.S. tax relating to that gain to Canadian Target’s Second Stub Year.

More generally:

• The allocation exercise referred to above is one essentially of looking at the amount of the income that drives US tax, and the equivalent income that drives Canadian tax, and then trying to achieve a match.
• To do that, the stream of income must be examined. If there is an even distribution of earnings throughout the year, then that would call for a daily proration. If the income is from a seasonal business, a more reasonable approach would be to match that season to the Canadian tax period. If the income comes from a single discrete event, the date of that event should determine the Canadian tax timing.
• CRA expects consistency in the approaches used, although unusual income events (like an extraordinary lump-sum payment) may warrant an unusual approach.

Neal Armstrong. Summary of Neal Armstrong. Summary of 13 May 2026 IFA Roundtable, Q.7 under s. 126(1).