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Thursday, February 8, 2024

CRA denies international tax credit score, pushing taxpayer to take CRA to court docket

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

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Claiming a international tax credit score is the first approach Canadian residents can keep away from paying double tax on international revenue, however the skill to assert a international tax credit score will not be all the time easy because it is determined by what is definitely thought-about to be a international tax.

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This got here up most not too long ago 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 evaluation the aim of the international tax credit score.

As Canadian residents, we’re taxable on our worldwide revenue. Meaning even revenue earned overseas, whether or not it’s international employment revenue or international funding revenue, is topic to Canadian tax at marginal tax charges. However this international revenue, typically, can be topic to international tax in that international jurisdiction. To keep away from paying double tax on the identical revenue, it’s possible you’ll be entitled to assert a international tax credit score in your Canadian return for international taxes paid on that international revenue.

For many of us, our solely expertise with claiming a international tax credit score probably happens if we earn international 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 revenue can be topic to a 15-per-cent non-resident withholding tax in the USA. I’d then pay Canadian tax on that U.S. dividend revenue at my regular marginal charges after I file my Canadian return, however be entitled to assert a international tax credit score for the non-resident tax withheld, thus avoiding double tax.

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The taxpayer within the latest case claimed a international 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 international tax credit and the taxpayer in the end took the matter to Tax Court docket.

In court docket, the taxpayer argued that the quantities at challenge had been withheld by the federal government in Spain, and may be handled as tax paid to a international jurisdiction. The CRA’s view was that these quantities weren’t a tax. The seminal challenge, due to this fact, was whether or not the quantities withheld by Spain could possibly be akin to a tax.

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

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Regardless of an absence of proof at trial, together with “little or no description” of the mechanics of amassing these funds, the authority beneath which it was performed, and whether or not the deductions had been subtracted from the gross revenue of the taxpayer as a part of his tax filings in Canada, the decide concluded that the primary three parts of the Supreme Court docket check had been met. In different phrases, the quantities being claimed had been probably 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 part of the Supreme Court docket’s check. The taxpayer testified that the quantities at challenge had been deducted by Spain so as to contribute to the Spanish nationwide pension plan. The taxpayer was unsure as to what advantages he’ll in the end obtain from the plan, however acknowledged he would probably obtain some funds sooner or later.

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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 had been made by the Spanish authorities for the longer term advantage of the contributor … These funds weren’t made so as to generate revenue for the state.” In consequence, these quantities didn’t qualify for international 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 nationwide insurance coverage plan in the UK had been additionally discovered to not be eligible for the international tax credit score. An analogous conclusion was reached once more by the Tax Court docket in a 2019 determination, which held that contributions to a international insurance coverage plan usually are 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.”

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One ultimate warning relating to claiming international tax credit. As famous above, a international tax credit score for withholding tax on funding revenue is barely out there when these investments are held in a non-registered account. However what should you maintain your international investments inside a registered plan, akin to a registered retirement financial savings plan (RRSP), registered retirement 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 tough. If, for instance, you maintain international shares in your registered account and dividends are paid on these shares, they’ll probably be topic to a 15-per-cent non-resident withholding tax by the payor nation earlier than hitting your registered plan. You need to think about this a sunk price, as a result of there is no such thing as a skill to assert a international 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 novel 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. Observe that this similar break doesn’t apply to U.S. dividends paid to a TFSA or RESP. That’s as a result of these accounts usually are not “operated solely to manage or present pension, retirement or worker advantages,” which is the requirement beneath 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 Personal Wealth in Toronto. Jamie.Golombek@cibc.com

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