Problem
Galaxy, Inc., ("Galaxy"), a U.S. corporation engaged in the engineering business, performed services under a contract with a Canadian 148corporation. The employee of Galaxy who performed the services is a U.S. citizen and resident and spent 25 working days in Canada and 50 working days in the United States. ($30,000 of the employee's wage income is properly allocable to the employee's work on this matter). Because the work in the United States was largely routine supervision of drafting of plans while the work in Canada demanded a high degree of creativity and presence above the Arctic Circle, Galaxy charged the Canadian corporation $50,000 for the work in Canada and $50,000 for the work in the United States.
Assume that Galaxy would like to maximize the amount of income treated as foreign-source because the income will be exempt from Canadian tax, and Galaxy has other income that generates excess foreign tax credits.
1. How much of the gross income for services can Galaxy treat as foreign-source gross income?
2. How much of the employee's wage income for services that is properly allocable to the employee's work on this contract can be treated as foreign-source income?"