CRA denies overseas tax credit score, pushing taxpayer to take CRA to courtroom

[ad_1]

Jamie Golombek: Capability to assert credit score not all the time easy

To keep away from paying double tax on the identical earnings, you could be entitled to assert a overseas tax credit score in your Canadian return for overseas taxes paid on that overseas earnings. Photograph by Getty Pictures/iStockphoto

Claiming a overseas tax credit score is the first means Canadian residents can keep away from paying double tax on overseas earnings, however the means to assert a overseas tax credit score just isn’t all the time easy because it is determined by what is definitely thought-about to be a overseas tax.

This got here up most lately in a case involving a Canadian resident working for the Spanish authorities on the Embassy of Spain in Ottawa. However earlier than delving into the case particulars, let’s overview the aim of the overseas tax credit score.

As Canadian residents, we’re taxable on our worldwide earnings. Meaning even earnings earned overseas, whether or not or not it’s overseas employment earnings or overseas funding earnings, is topic to Canadian tax at marginal tax charges. However this overseas earnings, generally, can be topic to overseas tax in that overseas jurisdiction. To keep away from paying double tax on the identical earnings, you could be entitled to assert 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 curiosity or dividends in a non-registered funding account. For instance, if I personal Pfizer Inc. shares in my non-registered buying and selling account, the dividend earnings can be topic to a 15-per-cent non-resident withholding tax in the US. I might then pay Canadian tax on that U.S. dividend earnings at my regular marginal charges once I file my Canadian return, however be entitled to assert a overseas tax credit score for the non-resident tax withheld, thus avoiding double tax.

The taxpayer within the current 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 pension plan in Spain. The Canada Income Company denied the taxpayer’s overseas tax credit and the taxpayer finally took the matter to Tax Court docket.

In courtroom, the taxpayer argued that the quantities at problem have been withheld by the federal government in Spain, and may be handled as tax paid to a overseas jurisdiction. The CRA’s view was that these quantities weren’t a tax. The seminal problem, due to this fact, was whether or not the quantities withheld by Spain may very well be akin to a tax.

To reply this query, the decide started with a overview of the 4 traits of a “tax,” as decided by a 1930 choice of the Supreme Court docket of Canada: enforceable by regulation, imposed underneath the authority of the legislature, imposed by a public physique and made for a public objective.

Regardless of a scarcity of proof at trial, together with “little or no description” of the mechanics of amassing these funds, the authority underneath which it was accomplished, and whether or not the deductions have been subtracted from the gross earnings of the taxpayer as a part of his tax filings in Canada, the decide concluded that the primary three elements of the Supreme Court docket take a look at have been met. In different phrases, the quantities being claimed have been possible withheld by the Spanish authorities due to Spanish laws that makes such funds obligatory.

The issue, the decide went on to clarify, lies with the ultimate element of the Supreme Court docket’s take a look at. The taxpayer testified that the quantities at problem have been deducted by Spain with a purpose to contribute to the Spanish nationwide pension plan. The taxpayer was unsure as to what advantages he’ll finally obtain from the plan, however acknowledged he would possible obtain some funds sooner or later.

The decide, due to this fact, concluded that the quantities collected by the Spanish authorities did “not meet the definition of a tax, in that they weren’t collected for a public curiosity … The pension deductions have been made by the Spanish authorities for the long run good thing about the contributor … These funds weren’t made with a purpose to generate earnings for the state.” Consequently, these quantities didn’t qualify for overseas tax credit.

This result’s in keeping with prior case regulation. For instance, in a 2001 tax case, contributions a Canadian taxpayer paid to a nationwide insurance coverage plan in the UK have been additionally discovered to not be eligible for the overseas tax credit score. The same conclusion was reached once more by the Tax Court docket in a 2019 choice, which held that contributions to a overseas insurance coverage plan should not a tax for public functions, partly as a result of the contributor receives “a direct private and monetary profit sooner or later for his or her contributions.”

One last warning on the subject of claiming overseas tax credit. As famous above, a overseas tax credit score for withholding tax on funding earnings is simply out there when these investments are held in a non-registered account. However what for those who maintain your overseas investments inside a registered plan, akin to a registered retirement financial savings plan (RRSP), registered retirement earnings fund (RRIF), tax-free financial savings account (TFSA) or registered training financial savings plan (RESP)?

That’s the place issues can get a bit difficult. If, for instance, you maintain overseas shares in your registered account and dividends are paid on these shares, they are going to possible be topic to a 15-per-cent non-resident withholding tax by the payor nation earlier than hitting your registered plan. You need to take into account this a sunk price, as a result of there isn’t a means to assert a overseas tax credit score for withholding tax paid by a registered account.

The one exception to the above is for U.S. shares held in an RRSP or RRIF. Due to a singular provision within the Canada-U.S. tax treaty, there may be an exemption from withholding tax that’s robotically utilized when U.S. dividends are paid to an RRSP or RRIF. Word that this identical break doesn’t apply to U.S. dividends paid to a TFSA or RESP. That’s as a result of these accounts should not “operated completely to manage or present 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 Planning with CIBC Non-public Wealth in Toronto. [email protected]

_____________________________________________________________

In the event you like this story, join the FP Investor E-newsletter.

_____________________________________________________________