13 November 2007 External T.I. 2007-0229931E5 - Foreign tax credit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: An individual is employed by a corporation and works in Angola. He is a factual resident of Canada. He pays income taxes on his remuneration to the Angolan government and pays income tax in Canada on that same remuneration. Is there a disposition in the Act to provide relief from double taxation

Position: General comments on the overseas employment tax credit and general comments on the foreign tax credit.

Reasons: Reference to IT-497R4 and IT-270R3.

XXXXXXXXXX 								2007-022993
									Sylvie Labarre, CA
November 13, 2007 

Dear Sir:

Re: Foreign Tax Credit

This is in reply to your electronic message of April 2, 2007 in which you requested our views with respect to the foreign tax credit in the following situation.

As an employee of a corporation, you work in Angola on a rotational basis and you pay taxes on your remuneration to the Angolan government as well as income tax to the Canadian government. The income taxes paid to the two governments amount to more than 54% of your remuneration. You ask whether you may be entitled to a reimbursement for a part of the income taxes paid.

Our comments

Although you have asked for a technical interpretation, the situation presented is a factual one involving a specific taxpayer. Requests for confirmation of the tax consequences of this type of situation are handled by the local tax services office. We are, however, prepared to provide some general comments.

From the above limited information provided in your message, it appears that you are a factual resident of Canada for Canadian income tax purposes. As a resident of Canada, your worldwide income is subject to Canadian income tax. There is no tax treaty between Canada and Angola.

An individual who is resident in Canada may be entitled to claim the overseas employment tax credit (OETC) for qualifying income from overseas employment. The OETC effectively eliminates 80% of the Canadian income tax on the first $100,000 of salary, wages and other remuneration earned from such employment. To qualify for the OETC, an individual must:

(a) be employed by a specified employer (generally, a resident of Canada), other than for the performance of services under a prescribed international development assistance program of the Government of Canada;

(b) be employed in connection with a contract (or for the purpose of obtaining such a contract) under which the specified employer carried on business outside Canada with respect to the exploration for or exploitation of petroleum, natural gas, minerals or other similar resources, with respect to any construction, installation, agricultural or engineering project or with respect to an activity performed under contract with the United Nations; and

(c) have performed all or substantially all the employment duties (done in connection with a contract described in (b) above) outside Canada.

The conditions described in (a) to (c) must exist for a period of more than six consecutive months

- within the year

- beginning in the year and ending in a subsequent year, or

- ending in the year and that began in a previous year.

You will find enclosed Interpretation Bulletin IT-497R4 that provides more information on the OETC. The information provided in your message is insufficient to determine whether or not you are entitled to the OETC.

Furthermore, there is a provision in the Act that gives relief from double taxation on certain income (including employment income), i.e., relief from having to pay tax to both Canada and another country on the same income. Indeed, section 126 of the Act makes a foreign tax credit available to a taxpayer who is resident of Canada at any time in a year. A foreign tax credit is a deduction from the taxpayer's Canadian tax otherwise payable that may be claimed in respect of foreign income or profits tax paid by the taxpayer for the year. The foreign tax credit under subsection 126(1) for non-business income tax paid by a taxpayer is available when a taxpayer earns foreign employment income.

In a situation where the employment income is the only foreign income of an individual and where the individual does not claim the OETC, the foreign tax credit for non-business income tax paid by the individual resident of Canada throughout the year to a particular country other than Canada is equal to the lesser of two amounts:

- the foreign tax paid (non-business tax paid);

- the portion of the Canadian tax otherwise payable that pertains to the applicable foreign non-business income (from the applicable foreign country).

Paragraph 1 of Interpretation Bulletin IT-270R3 explains how to compute the second amount (the portion of the Canadian tax). When an individual has only foreign non-business income, he can calculate his foreign tax credit on Schedule 1 Federal Tax of the T1 General - Income Tax and Benefit Return. Otherwise, he has to use Form T2209, Federal Foreign Tax Credits.

If an individual claims an OETC and a foreign income tax has been paid in respect of foreign employment income, the foreign tax credit provisions of the Act operate so as not to allow the foreign tax credit for that portion of the foreign income tax paid on foreign employment income in respect of which an OETC has been claimed.

You will find in Interpretation Bulletin IT-270R3 (enclosed) a detailed description of the provisions of the Act that determine the calculation of the foreign tax credit and interpretations regarding certain rules and requirements contained in the foreign tax credit provisions (including comments on how to apply those provisions in certain circumstances).

We trust the above comments will be of some assistance.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

Encl.(2)