CRA denies foreign tax credit, pushing taxpayer to take CRA to court

Jamie Golombek: Skill to say credit score no longer all the time simple

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Claiming a overseas tax credit score is the main method Canadian citizens can steer clear of paying double tax on overseas source of revenue, however the skill to say a overseas tax credit score isn’t all the time simple because it depends upon what’s if truth be told thought to be to be a overseas tax.

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This got here up maximum not too long ago in a case involving a Canadian resident running for the Spanish executive on the Embassy of Spain in Ottawa. However sooner than delving into the case main points, let’s assessment the aim of the overseas tax credit score.

As Canadian citizens, we’re taxable on our international source of revenue. That implies even source of revenue earned out of the country, whether or not or not it’s overseas employment source of revenue or overseas funding source of revenue, is matter to Canadian tax at marginal tax charges. However this overseas source of revenue, most often, could also be matter to overseas tax in that overseas jurisdiction. To steer clear of paying double tax at the identical source of revenue, you’ll be entitled to say a overseas tax credit score in your Canadian go back for overseas taxes paid on that overseas source of revenue.

For many people, our simplest enjoy with claiming a overseas tax credit score most likely happens if we earn overseas pastime or dividends in a non-registered funding account. For instance, if I personal Pfizer Inc. stocks in my non-registered buying and selling account, the dividend source of revenue can be matter to a 15-per-cent non-resident withholding tax in america. I’d then pay Canadian tax on that U.S. dividend source of revenue at my standard marginal charges once I report my Canadian go back, however be entitled to say a overseas tax credit score for the non-resident tax withheld, thus averting double tax.

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The taxpayer within the contemporary case claimed a overseas tax credit score of $842 in 2016, $2,527 in 2017 and $2,545 in 2018, consisting of necessary contributions to a nationally run 401-k plan in Spain. The Canada Earnings Company denied the taxpayer’s overseas tax credit and the taxpayer in the long run took the subject to Tax Courtroom.

In courtroom, the taxpayer argued that the quantities at factor have been withheld via the federal government in Spain, and must be handled as tax paid to a overseas jurisdiction. The CRA’s view was once that those quantities weren’t a tax. The seminal factor, subsequently, was once whether or not the quantities withheld via Spain might be comparable to a tax.

To respond to this query, the pass judgement on started with a assessment of the 4 traits of a “tax,” as made up our minds via a 1930 resolution of the Ideally suited Courtroom of Canada: enforceable via regulation, imposed underneath the authority of the legislature, imposed via a public frame and made for a public goal.

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In spite of a loss of proof at trial, together with “little or no description” of the mechanics of amassing those finances, the authority underneath which it was once completed, and whether or not the deductions have been subtracted from the gross source of revenue of the taxpayer as a part of his tax filings in Canada, the pass judgement on concluded that the primary 3 elements of the Ideally suited Courtroom check have been met. In different phrases, the quantities being claimed have been most likely withheld via the Spanish executive as a result of Spanish regulation that makes such bills obligatory.

The issue, the pass judgement on went on to give an explanation for, lies with the general part of the Ideally suited Courtroom’s check. The taxpayer testified that the quantities at factor have been deducted via Spain with the intention to give a contribution to the Spanish nationwide 401-k plan. The taxpayer was once unsure as to what advantages he’s going to in the long run obtain from the plan, however stated he would most likely obtain some bills at some point.

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The pass judgement on, subsequently, concluded that the quantities accumulated via the Spanish executive did “no longer meet the definition of a tax, in that they weren’t accumulated for a public pastime … The pension deductions have been made via the Spanish executive for the longer term advantage of the contributor … Those bills weren’t made with the intention to generate source of revenue for the state.” Consequently, those quantities didn’t qualify for overseas tax credit.

This result’s in step with prior case regulation. For instance, in a 2001 tax case, contributions a Canadian taxpayer paid to a countrywide insurance coverage plan in the UK have been additionally discovered to not be eligible for the overseas tax credit score. A identical conclusion was once reached once more via the Tax Courtroom in a 2019 resolution, which held that contributions to a overseas insurance coverage plan aren’t a tax for public functions, in part since the contributor receives “an immediate private and fiscal receive advantages at some point for his or her contributions.”

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One ultimate warning with regards to claiming overseas tax credit. As famous above, a overseas tax credit score for withholding tax on funding source of revenue is simplest to be had when the ones investments are held in a non-registered account. However what if you happen to dangle your overseas investments inside a registered plan, similar to a registered retirement financial savings plan (RRSP), registered retirement source of revenue fund (RRIF), tax-free financial savings account (TFSA) or registered schooling financial savings plan (RESP)?

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That’s the place issues can get a bit of tough. If, for instance, you dangle overseas shares on your registered account and dividends are paid on the ones shares, they are going to most likely be matter to a 15-per-cent non-resident withholding tax via the payor nation sooner than hitting your registered plan. You must believe this a sunk value, as a result of there’s no skill to say a overseas tax credit score for withholding tax paid via a registered account.

The only exception to the above is for U.S. shares held in an RRSP or RRIF. On account of a singular provision within the Canada-U.S. tax treaty, there may be an exemption from withholding tax this is mechanically carried out when U.S. dividends are paid to an RRSP or RRIF. Be aware that this identical destroy does no longer follow to U.S. dividends paid to a TFSA or RESP. That’s as a result of those accounts aren’t “operated solely to manage or supply pension, retirement or worker advantages,” which is the requirement underneath the Canada-U.S. treaty to be exempt from withholding tax.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Making plans with CIBC Non-public Wealth in Toronto.


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