Dorothy E Croft v. Minister of National Revenue, [1985] 1 CTC 2096, 85 DTC 95

Bonner, TCJ:—This is an appeal from an assessment of income tax for the 1981 taxation year. At issue is the appellant’s claim to deduct as a foreign tax credit the full amount of taxes paid to the United States on investment income from sources in that country.

The facts are not in dispute. The appellant at all relevant times was a citizen of the United States and a resident of Canada. During 1981 she received investment income from foreign sources including sources in the United States. The respondent, in assessing Part I tax, allowed a deduction from tax under subsection 126(1) of the Income Tax Act. The deduction allowed was, by virtue of the definition of “non-business income” to be found in paragraph 126(7)(c) of the Act, limited to foreign tax paid minus the amount deductible by virtue of subsection 20(11). That provision permits the deduction in the computation of income from property of foreign taxes paid to the extent that such taxes exceed 15 per cent of the income of the taxpayer from the foreign source.

The arguments advanced by the appellant at the hearing are in substance set forth in her notice of appeal as follows:

The stated purpose of the Treaty is to avoid double taxation. Under Article XV of the Treaty, Canada, “as far as may be in accordance with the provisions of the Income Tax Act", agrees to allow as a deduction the appropriate amount of taxes paid to the US on US source income.

However, by virtue of Article XVII, Canada recognizes that the US tax base is different than that of Canada in that the US taxes both residents and citizens on world income whereas Canada taxes only residents. Article XVII allows the US to continue to tax on the basis of citizenship without restriction. This is presumably so notwithstanding a particular US citizen may be resident in Canada and not resident in the US. That is precisely my circumstances and the US has indeed imposed a tax on my US source income in excess of 15 per cent.

Further section 11 of the Protocol of the Treaty states that citizens of one country residing in the other country shall not be subject to the payment of more burdensome tax than a citizen of the other country. In my circumstances, I am a citizen of the US residing in Canada and as a result of the 1976 amendment to the foreign tax credit provisions of the Canadian Income Tax Act, I am paying substantially more total tax on my US source income than would a citizen (resident) of Canada who is not also a citizen of the US. It would seem that Article XVII of section 11 of the Protocol are only compatible if Canada allows a US citizen who is resident in Canada a full credit for taxes paid in the US on US source income. This, of course, was the case previous to the unilateral amendment by Canada in 1976 of its foreign tax credit provisions.

It is my position that the Treaty clearly provides that, whereas the US can tax me as it sees fit as a citizen of the US, Canada undertakes, in itself imposing tax, that I will not be subject to more total tax on that income than if Canada was the only jurisdiction imposing tax. This can only be accomplished if Canada allows me a full credit for the US taxes that I have paid. Canada, by amending the foreign tax credit provisions in 1976, has thus unilaterally altered the Treaty.

There is no double taxation here. The assessment does not impose tax on the amounts taxed away by the United States. The scheme of the provisions of the Income Tax Act referred to above is such that the amount included in income was not greater than the gross amount of the income in question less the foreign tax paid on it. Nothing in Article XVII of the 1942 Canada-US Tax Convention can be read as imposing upon Canada an obligation to provide one tax dollar of Canadian relief for every dollar of tax imposed by the United States on its citizens.

The assessment does not offend Article XV of the Convention. This Article establishes “. . . a mutual covenant to apply as between each country whatever foreign tax credit provision the respective domestic laws of each country might from time to time adopt .. . .”.* [1]

The respondent, in making the assessment in issue, has not imposed on the appellant any more burdensome tax than that which would be imposed on any citizen of Canada in like circumstances. Thus, section 11 of the Protocol has not been breached. Section 11 does not prohibit either state from imposing tax in an amount which, when added to the tax imposed by the other state, will result in a total exceeding the liability of a person subject to tax only in the first state.

For the foregoing reasons the appeal is dismissed.

Appeal dismissed.