No person needs to pay greater than their justifiable share 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. The truth is, chances are you’ll be so upset that you simply’re keen to take the tax man to court docket to combat it.
And that’s precisely what one taxpayer did when the Canada Income Company refused to grant her overseas tax credit for taxes she paid on funding earnings she earned exterior 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 manner Canadian residents can keep away from paying double tax on overseas earnings. As Canadian residents, we’re taxable on our worldwide earnings. Meaning even earnings earned overseas, whether or not it’s overseas employment earnings or overseas funding earnings , is topic to Canadian tax at home, progressive marginal tax charges. However this overseas earnings, normally, can be topic to overseas tax in that overseas jurisdiction. To keep away from paying double tax on the identical earnings, chances are 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 possible 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 could be topic to a 15 per cent nonresident withholding tax in the US. 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.
Lately, nonetheless, it has change into tougher for some Canadian taxpayers to say a overseas tax credit score, because the CRA is now demanding further proof that overseas taxes have been paid. In some instances, 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 adequate 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 corporations in these accounts.
The CRA denied the overseas tax credit, arguing that it was not sufficient for the taxpayer to indicate that tax was withheld, however quite 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 overseas returns ready.
The decide reviewed the information of the case, noting that the CRA appears to be taking a place opposite to its personal revealed administrative coverage, as outlined in Revenue 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 manner which is analogous to tax below Half XIII of the Act), a duplicate of the overseas tax data slip is normally passable. In most different instances, a duplicate of the tax return filed with the overseas 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 Revenue 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 decide famous, the taxpayer’s state of affairs appears to be “actually analogous to tax below Half XIII.”
The CRA was unable to clarify why the company didn’t think about the overseas tax data slips supplied by the taxpayer to be passable. It didn’t look like on account of any issues about their authenticity or accuracy.
As an alternative, the CRA referred to 2 prior Tax Court docket selections 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 instances stand for the proposition {that a} taxpayer can’t declare a overseas tax credit score if they didn’t, in reality, pay overseas tax, “(t)hey don’t, nonetheless, stand for the proposition that taxpayers should present overseas tax assessments with the intention to declare overseas tax credit.”
Because of this, 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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