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


Jamie Golombek: Capacity to assert credit score not all the time simple

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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 earnings, however the capacity to assert a international tax credit score shouldn't be all the time simple because it will depend on what is definitely thought of 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 assessment the aim of the international tax credit score.

As Canadian residents, we’re taxable on our worldwide earnings. Which means even earnings earned overseas, whether or not it's international employment earnings or international funding earnings, is topic to Canadian tax at marginal tax charges. However this international earnings, usually, can be topic to international tax in that international jurisdiction. To keep away from paying double tax on the identical earnings, you could be entitled to assert 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 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 could be topic to a 15-per-cent non-resident withholding tax in america. I'd then pay Canadian tax on that U.S. dividend earnings 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 current case claimed a international tax credit score of $842 in 2016, $2,527 in 2017 and $2,545 in 2018, consisting of obligatory 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 Courtroom.

In courtroom, the taxpayer argued that the quantities at situation have been withheld by the federal government in Spain, and will be handled as tax paid to a international jurisdiction. The CRA’s view was that these quantities weren't a tax. The seminal situation, subsequently, was whether or not the quantities withheld by Spain might be akin to a tax.

To reply this query, the decide started with a assessment of the 4 traits of a “tax,” as decided by a 1930 determination of the Supreme Courtroom of Canada: enforceable by legislation, imposed below 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 accumulating these funds, the authority below which it was performed, 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 parts of the Supreme Courtroom take a look at have been met. In different phrases, the quantities being claimed have been doubtless withheld by the Spanish authorities due to Spanish laws that makes such funds obligatory.

The issue, the decide went on to elucidate, lies with the ultimate part of the Supreme Courtroom’s take a look at. The taxpayer testified that the quantities at situation have been deducted by Spain with the intention 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 doubtless obtain some funds sooner or later.

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The decide, subsequently, 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 the intention to generate earnings for the state.” Consequently, these quantities didn't qualify for international tax credit.

This result's in keeping with prior case legislation. 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 international tax credit score. The same conclusion was reached once more by the Tax Courtroom 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 remaining warning with regards to claiming international tax credit. As famous above, a international tax credit score for withholding tax on funding earnings is just out there when these investments are held in a non-registered account. However what when you maintain your international 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)?

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That’s the place issues can get a bit difficult. If, for instance, you maintain international shares in your registered account and dividends are paid on these shares, they'll doubtless be topic to a 15-per-cent non-resident withholding tax by the payor nation earlier than hitting your registered plan. You must contemplate this a sunk price, as a result of there is no such thing as a capacity 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. Be aware 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 usually are not “operated solely to manage or present pension, retirement or worker advantages,” which is the requirement below 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. Jamie.Golombek@cibc.com

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