Foreign tax credit (s. 126)

A seller whose business earns United States or other foreign income meets this credit in the tax filings a buyer may ask to read. Section 126(1) of the Income Tax Act lets a taxpayer who was resident in Canada at any time in a taxation year deduct, from the tax otherwise payable, an amount for non-business-income tax paid to the government of a country other than Canada; for a corporation, tax that may reasonably be regarded as paid on income from a share of a foreign affiliate is excepted. Section 126(2) allows a deduction where the taxpayer carried on business in a country other than Canada. Both are subject to the limits and exceptions in s. 126. The CRA’s folio on the credit describes it as a deduction from the taxpayer’s Canadian tax otherwise payable.

How it is claimed

The CRA’s folio separates credits for foreign non-business-income tax from credits for foreign business-income tax, and says the maximum for each is essentially the lesser of two amounts. It also says non-business claims are deducted first when the business-income credit is worked out. The folio says corporations claiming the credit should use T2 Schedule 21. The calculation is intricate, so this entry points to section 126 and the folio rather than summarizing it.

What to ask in a sale

• Which countries’ taxes were paid, and whether credits were claimed for them
• Whether unused foreign business-income tax credits were carried forward or back, and for which years
• Whether the buyer’s structure would let the same credits be used (a tax adviser should confirm)

Cross-border sale terms can also create tax questions; see cross-border earn-outs and tax.