Canadians, other than non-residents of Canada for tax purposes, are taxed on their worldwide income. However, Canadians who pay taxes in another jurisdiction, may be able to claim a foreign tax credit so that double taxation does not occur. Section 126 of the Income Tax Act allows for foreign tax credits, even where Canada has not entered into a tax treaty with the other country.

 

tax credits

Tax Treaties

Canada has tax treaties with many countries, the principle purpose of which is to avoid double taxation and tax evasion. These treaties typically define which taxes are covered, and who is a resident so that taxes are paid to the correct jurisdiction.

 

 

 

Provincial or Territorial Foreign Tax Credit

There are times where the federal foreign tax credit will be less than the taxes you paid in a foreign jurisdiction. Where this occurs, you may be eligible for a tax credit from the province or territory in which you live.

 

Tax Information Exchange Agreements

There are countries, and territories that Canada does not yet have a tax treaty with. However, Canada has entered into tax information exchange agreements with some of these countries and territories. Canada does this in order to seek out information about offshore tax evasion, and regularly asks other jurisdictions for documentation that could assist in this purpose. If you have offshore income, and have not yet reported it, a voluntary disclosure may be right for you.

 

The Canada Revenue Agency (CRA) has stringent guidelines as to what documentation and support it will accept when taxpayers claim foreign tax credits. If you are unsure whether you qualify for a foreign tax credit, or have claimed a foreign tax credit, and are being audited or pre-assessed by CRA, give us a call today to see how we can help!

 

CRA Resources

Foreign Income Taxes as a Deduction from Income

Foreign Tax Credit – Trust and Beneficiaries

S5-F2-C1 – Foreign Tax Credit

Provincial or Territorial Foreign Tax Credit

T2209 – Federal Foreign Tax Credits

Line 405 – Federal Foreign Tax Credit

 

Case Law

Yankulov v. The Queen, 2008 TCC 657 – Calculation of Foreign Tax Credit

Bujnowski v. Canada, 2006 FCA 32 – Tie-Breaker Rules

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.