No person needs to pay greater than their fair proportion of tax. So, think about when you needed to pay double tax. In different phrases, what if the identical earnings was taxed twice, as soon as overseas, and as soon as once more in Canada? You wouldn’t be happy. Actually, it’s possible you’ll be so upset that you just’re prepared to take the tax man to courtroom to battle it.
And that’s precisely what one taxpayer did when the Canada Revenue Agency refused to grant her foreign tax credits for taxes she paid on funding earnings she earned outdoors of Canada. Earlier than delving into the small print of this current case, determined earlier this month, let’s assessment Canada’s overseas tax credit score system.
Claiming a overseas tax credit score is the first approach Canadian residents can keep away from paying double tax on overseas earnings. As Canadian residents, we’re taxable on our worldwide earnings. Which means even earnings earned overseas, whether or not or not it’s overseas employment earnings or foreign investment income , is topic to Canadian tax at home, progressive marginal tax charges. However this overseas earnings, generally, can also be topic to overseas tax in that overseas jurisdiction. To keep away from paying double tax on the identical earnings, it’s possible you’ll be entitled to say a overseas tax credit score in your Canadian return for overseas taxes paid on that overseas earnings.
For many of us, our solely expertise with claiming a overseas tax credit score doubtless happens if we earn overseas dividends, comparable to U.S. dividends, in a non-registered funding account. Let’s say I personal inventory in a publicly traded U.S. firm with a excessive dividend yield in my non-registered buying and selling account. The dividend earnings can be topic to a 15 per cent nonresident withholding tax in america. I might then pay Canadian tax on the gross quantity of the U.S. dividend earnings at my regular marginal charges once I file my Canadian return, however be entitled to say a overseas tax credit score for the nonresident tax withheld, thus avoiding double tax.
In recent times, nonetheless, it has turn out to be tougher for some Canadian taxpayers to say a overseas tax credit score, because the CRA is now demanding further proof that overseas taxes had been paid. In some circumstances, the company is requesting copies of overseas tax returns, together with transcripts or assessments from the overseas jurisdictions, displaying that overseas tax was, certainly, owing and paid. It appears to not be ample to easily level to the withholding tax proven on a tax slip to be entitled to say the overseas tax credit score. Which brings us to this most up-to-date case.
The taxpayer is a Canadian resident who holds funding accounts within the U.S. and Switzerland. When she filed her tax returns for her 2021 to 2024 taxation years , she claimed overseas tax credit for withholding taxes paid on dividend earnings that she earned on shares of German and Swiss firms in these accounts.
The CRA denied the overseas tax credit, arguing that it was not sufficient for the taxpayer to point out that tax was withheld, however moderately that the taxpayer wanted to point out that she really needed to pay tax to Germany and Switzerland.
The taxpayer argued that the one approach for her to probably present that is to supply tax assessments from these nations. However the taxpayer doesn’t have tax assessments from Germany or Switzerland as a result of she earned too little earnings in these nations to justify the expense of getting the overseas returns ready.
The decide reviewed the details of the case, noting that the CRA appears to be taking a place opposite to its personal printed administrative coverage, as outlined in Income Tax Folio S5-F2-C1 , International Tax Credit score. This folio units out the documentary proof that the CRA expects from a taxpayer claiming a overseas tax credit score, and appears to particularly (at paragraph 1.45) ponder a state of affairs just like the taxpayer’s the place earnings tax is withheld at supply. The folio states that if “a taxpayer’s overseas tax legal responsibility is settled by an quantity withheld by the payer of the associated earnings (that’s, in a approach which is analogous to tax beneath Half XIII of the Act), a replica of the overseas tax data slip is normally passable. In most different circumstances, a replica of the tax return filed with the overseas authorities is required along with copies of receipts or paperwork establishing fee.”
The reference to “Half XIII of the Act” is referring to Canada’s personal Income Tax Act , and our withholding tax regime beneath that a part of the Act, which imposes Canadian withholding taxes on Canadian dividend earnings paid to non-residents of Canada. Because the decide famous, the taxpayer’s state of affairs appears to be “definitely analogous to tax beneath Half XIII.”
The CRA was unable to elucidate why the company didn’t think about the overseas tax data slips supplied by the taxpayer to be passable. It didn’t seem like as a consequence of any considerations about their authenticity or accuracy.
As an alternative, the CRA referred to 2 prior Tax Court decisions the place taxes had initially been withheld from earnings, however when the Canadian taxpayers filed their tax returns with the overseas authorities, it turned out that they didn’t should pay any tax to the overseas authorities as a result of they certified for numerous credit.
Whereas the decide agreed that these two circumstances stand for the proposition {that a} taxpayer can’t declare a overseas tax credit score if they didn’t, the truth is, pay overseas tax, “(t)hey don’t, nonetheless, stand for the proposition that taxpayers should present overseas tax assessments so as to declare overseas tax credit.”
Consequently, the decide was glad that the taxpayer did, certainly, pay nonresident tax to each Germany and Switzerland, and ordered the matter despatched again to the CRA to permit the suitable overseas tax credit.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com .
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