Words and Phrases - "paid for the year"

A Canadian resident individual taxpayer reported the income (which was not distributed) of a wholly-owned S Corporation in his U.S. tax return in 2006. He claimed a deduction under s. 20(12) respecting the U.S. tax that he paid on such income. CRA stated:

[A] deduction in a taxation year under subsection 20(12)…for U.S. tax paid by the taxpayer for the year in respect of his share of income of an S Corporation is not to be denied even though the taxpayer does not receive a distribution from the S Corporation in the year. …

[I]n...Kaiser...91 DTC 1057...the taxpayer tried [unsuccessfully] to convince the Tax Court that foreign taxes paid on employment income were deductible under subsection 20(12)... . However, the Department of Finance did not want to leave any chance that foreign tax paid on income other than income from a business or property could be construed as being deductible under section 20(12)... .

[T]he intended use of the expression "in respect of that income" in subsection 20(12) of the Act was to clarify that non-business-income taxes paid on income from sources other than business or property (e.g., employment income) are not deductible... . All that is required is that there is a potential source of income from a business or property and that the non-business-income taxes relate to that source of income. ...

[T]he term "paid ... for the year"...relates to the year for which the taxpayer is liable to pay tax to the foreign jurisdiction for the income which is considered to have been earned under the tax law of the foreign jurisdiction even though the income may not be realized in Canada in the year for which the foreign tax is paid.

Note: this Technical Interpretation was discussed with approval in the FL Smidth case, supra, 2012 TCC 3, aff'd on narrower grounds 2013 FCA 160, where Paris J stated (at para. 43) that “the CRA accepted that the 20(12) deduction was available where the U.S. tax was paid on income from a source that is different from the taxpayer’s source of income under the Act. Presumably, the CRA accepted that the U.S. tax was paid in respect of the shareholder’s income from property under the Act because the corporation’s income is paid out to the shareholder eventually and taxed as income from property. [emphasis in original]”