Rev. Rul. 65-273

Advice has been requested whether the Province of Ontario and the Dominion of Canada should be considered separate foreign countries for purposes of the limitation on credit on account of foreign taxes under section 904 of the Internal Revenue Code of 1954.

Sections 901 through 905 of the Code provide the general and specific rules under which taxes paid to foreign countries may be taken as credits against United States income tax. The amount allowable as a credit for income or profits taxes paid or accrued to a foreign country or a possession of the United States is subject to the limitations prescribed in either the `per country' or `overall' limitation set forth in section 904(a)(1) and (2) of the Code.

Section 1.901-2(b) of the Income Tax Regulations provides that as used in sections 901 to 905 of the Code, inclusive, the term `foreign country' means any foreign state or political subdivision thereof, or any foreign political entity, which levies and collects income, war profits, or excess profits taxes.

The language of section 1.901-2(b) of the regulations, does not sanction the interpretation that the Dominion of Canada and the Province of Ontario are separate countries for purposes of computing the foreign tax credit limitation under section 904 of the Code. Section 1.901-2(b) of the regulations, is interpreted to be merely declaratory of the proposition that taxes paid to a political subdivision of a foreign country as well as taxes paid to such foreign country itself are taxes paid to a foreign country. This interpretation is consistent with the rationale of the Supreme Court of the United States in Burnet v. Chicago Portrait Company 285 U.S. 1 (1932), Ct. D. 463, C.B. XI-1, 286 (1932).

Accordingly, in determining the limitation under section 904(a) of the Code, the Province of Ontario is not a separate country and, for purposes of that section, the amount of income taxes paid to the Province of Ontario and the amount paid to the Dominion of Canada must be combined and treated as having been paid to the latter.