No person needs to pay greater than their fair proportion of tax. So, think about in case 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, chances are you’ll be so upset that you just’re keen to take the tax man to court docket to battle it.
And that’s precisely what one taxpayer did when the Canada Income Company refused to grant her international tax credit for taxes she paid on funding earnings she earned exterior of Canada. Earlier than delving into the main points of this current case, determined earlier this month, let’s overview Canada’s international tax credit score system.
Claiming a international tax credit score is the first manner Canadian residents can keep away from paying double tax on international earnings. As Canadian residents, we’re taxable on our worldwide earnings. Which means even earnings earned overseas, whether or not or not it’s international employment earnings or international funding earnings , is topic to Canadian tax at home, progressive marginal tax charges. However this international earnings, generally, can also be topic to international tax in that international jurisdiction. To keep away from paying double tax on the identical earnings, chances are you’ll be entitled to say a international tax credit score in your Canadian return for international taxes paid on that international earnings.
For many of us, our solely expertise with claiming a international tax credit score doubtless happens if we earn international dividends, similar 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 could be topic to a 15 per cent nonresident withholding tax in the USA. I might then pay Canadian tax on the gross quantity of the U.S. dividend earnings at my regular marginal charges after I file my Canadian return, however be entitled to say a international tax credit score for the nonresident tax withheld, thus avoiding double tax.
In recent times, nevertheless, it has turn into tougher for some Canadian taxpayers to say a international tax credit score, because the CRA is now demanding extra proof that international taxes have been paid. In some circumstances, the company is requesting copies of international tax returns, together with transcripts or assessments from the international jurisdictions, displaying that international tax was, certainly, owing and paid. It appears to now not be enough to easily level to the withholding tax proven on a tax slip to be entitled to say the international 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 international 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 international tax credit, arguing that it was not sufficient for the taxpayer to indicate that tax was withheld, however relatively that the taxpayer wanted to indicate that she really needed to pay tax to Germany and Switzerland.
The taxpayer argued that the one manner for her to presumably present that is to supply tax assessments from these international locations. However the taxpayer doesn’t have tax assessments from Germany or Switzerland as a result of she earned too little earnings in these international locations to justify the expense of getting the international returns ready.
The choose 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 Earnings 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 international tax credit score, and appears to particularly (at paragraph 1.45) ponder a scenario just like the taxpayer’s the place earnings tax is withheld at supply. The folio states that if “a taxpayer’s international tax legal responsibility is settled by an quantity withheld by the payer of the associated earnings (that’s, in a manner which is analogous to tax below Half XIII of the Act), a duplicate of the international tax data slip is normally passable. In most different circumstances, a duplicate of the tax return filed with the international authorities is required along with copies of receipts or paperwork establishing cost.”
The reference to “Half XIII of the Act” is referring to Canada’s personal Earnings Tax Act , and our withholding tax regime below that a part of the Act, which imposes Canadian withholding taxes on Canadian dividend earnings paid to non-residents of Canada. Because the choose famous, the taxpayer’s scenario appears to be “definitely analogous to tax below Half XIII.”
The CRA was unable to elucidate why the company didn’t contemplate the international tax data slips offered by the taxpayer to be passable. It didn’t look like attributable to any issues about their authenticity or accuracy.
As a substitute, the CRA referred to 2 prior Tax Courtroom selections the place taxes had initially been withheld from earnings, however when the Canadian taxpayers filed their tax returns with the international authorities, it turned out that they didn’t must pay any tax to the international authorities as a result of they certified for numerous credit.
Whereas the choose agreed that these two circumstances stand for the proposition {that a} taxpayer can’t declare a international tax credit score if they didn’t, actually, pay international tax, “(t)hey don’t, nevertheless, stand for the proposition that taxpayers should present international tax assessments with the intention to declare international tax credit.”
Consequently, the choose was happy 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 international tax credit.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com .
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