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.
Please note that the following document, although believed
to be correct at the time of issue, may not represent the
current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis,
peut ne pas représenter la position actuelle du ministère.
Foreign tax credit for U.S. green card holders
U.S. tax paid in excess of what is required under the
Canada-U.S. tax treaty is not creditable
It is because it is paid voluntarily and is thus not an
income or profit tax
XXXXXXXXXX S. Leung
December 20, 1996
Re: Foreign Tax Credits for U.S. "Green Card Holders"
Who are Resident in Canada For Purposes Of the Canada-
U.S. Income Tax Convention (the "Convention")
We are writing in reply to your letter of May 31, 1996 in which you enquired about whether foreign tax credits under section 126 of the Income Tax Act (the "Act") or deductions under subsection 20(11) or 20(12) thereof in respect of U.S. income tax paid are available to U.S. "green card holders" where the "green card holders" who are resident in Canada for purposes of the Convention choose not to claim treaty benefits with respect to any items of income covered by the Convention.
It is our understanding that U.S. "green card holders" are permanent residents of the U.S. for both U.S. immigration and income tax purposes. As U.S. resident aliens, the "green card holders" are taxed in the U.S. on their world-wide income same as U.S. citizens. However, if in accordance with the provisions of an income tax treaty that the U.S. has with another country a resident alien is
considered to be a resident of the other country, the resident alien will, under the Internal Revenue Code (the "Code") and the Regulations thereof, have a choice of either (i) claiming treaty benefits and be treated for U.S. tax purposes as a non-resident alien of the U.S. with respect to items of income dealt with in that treaty or (ii) not claiming any treaty benefits and be treated for purposes of the Code as a U.S. resident alien.
For Canadian tax purposes, if a U.S. resident alien who is a resident of Canada for purposes of the Convention chooses not to claim any treaty benefits under the Convention and pays U.S. income tax in excess of what is required by the Convention, as the Convention has removed the obligation to pay the excess U.S. tax, Canada would consider the overpayment of U.S. tax as a voluntary payment and not an income or profit tax eligible for a foreign tax credit under section 126 of the Act or a deduction under either subsection 20(11) or 20(12) of the Act. Such a person would not be treated differently than any other persons resident
in Canada for purposes of the Convention where the Convention removes the obligation to pay U.S. income taxes.
In addition, it is clearly not appropriate for Canada to provide tax credits or deductions for U.S. taxes which may be paid on income earned from sources in Canada by such a person.
One of the purposes of Canada's tax treaties with other countries besides the avoidance of double taxation and the prevention of fiscal evasion of income taxes is to allocate and limit taxing powers of two Contracting States. For example, under Article X of the Convention the rate of tax imposed by the U.S. on U.S. source dividends paid to a U.S. resident alien who is a resident of Canada for purposes of the Convention is limited to 15% of the gross amount of the dividends. Under paragraph 2 of Article XXIV of the Convention, Canada would grant a tax credit to that extent and the U.S. is obligated to ensure that the income tax on such income does not exceed the limit allowed under the Convention. The effect of the limit is to give Canada a greater share of the overall tax burden. For Canada to grant a credit for the excess U.S. taxes under section 126 of the Act in this circumstance would conflict with the clear intention of the Convention of limiting the U.S. tax on income of Canadian residents (as determined in accordance
with Article IV of the Convention). It should be noted that if excess U.S. taxes are paid by a U.S. resident alien who in fact is a resident of Canada for purposes of the Convention, pursuant to the Convention such person is entitled to a refund of such excess U.S. taxes from the U.S. tax authorities.
To illustrate the above principle, consider the following example. Assume a U.S. resident alien who is a resident of Canada for purposes of the Convention has the following types of income (ignoring foreign exchange):
U.S. source dividends $ 5,000
U.S. source employment income exempt from
U.S. tax under Article XV of the Convention 8,000
Other U.S. source income taxable in the U.S. without any limitation by the Convention 20,000
Canadian source income 150,000
Total taxable income $183,000
Assuming U.S. tax rate of 40% and Canadian tax rate of 50%, U.S. and Canadian taxes on such amount of taxable income are $73,200 and $91,500, respectively. If the taxpayer is allowed a foreign tax credit in Canada for all of his or her U.S. taxes paid, such tax credit would be $13,200 and Canadian tax after such tax credit would be $78,300 (i.e. $91,500 - $13,200) while the U.S. tax would be $13,200, totalling $91,500 in tax liabilities in both countries.
However, in accordance with the Convention the U.S. is not allowed to tax the U.S. source employment income of $8,000 and the Canadian source income of $150,000. It is allowed to tax the U.S. source dividends of $5,000 only at a maximum rate of 15% (i.e., $750) and the other U.S. source income of $20,000 at the full 40% tax rate (i.e., $8,000), resulting in a total U.S. tax of $8,750. Canada would, under paragraph 2 of Article XXIV of the Convention, grant a tax credit for U.S. taxes paid or accrued on U.S. income,
profits or gains arising in the U.S. (within the meaning of paragraph 3 of Article XXIV of the Convention), that is, in this case not exceeding the U.S. tax of $8,750. Canadian tax after the tax credit would then be $82,750 (i.e. $91,500 - $8,750) while the U.S. is $8,750, totalling $91,500. The taxpayer's overall tax burden does not increase. In this case the Convention has allocated a greater share of the tax burden to Canada by limiting the U.S. tax on the dividends to 15% of the gross amount of the dividends and eliminating the U.S. tax on the $8,000 employment income from the U.S. because the taxpayer is a resident of Canada for the purposes of the Convention.
While paragraph 1 of Article XXIX of the Convention stipulates that the Convention is not to have the effect of limiting any credit provided under the laws of a Contracting State in determining the income tax payable of that State, it does not override the fact that the Convention removes the obligation to pay the excess U.S. taxes. Furthermore, a taxpayer should not be able to choose to pay more tax than what he or she is required to pay by the Convention to one Contracting State at the expense of the other, especially when the taxpayer's overall tax burden is not affected, only the portion of the tax paid to each of the Contracting
States is altered. Otherwise, it would seem that the purpose of limiting and allocating taxing powers of the two Contracting States would be defeated.
Where a U.S. resident alien chooses not to claim treaty benefits to avoid potential jeopardy of his or her immigration status in the U.S., it is our view that such a personal choice would not cause Canada to be obligated to grant a tax credit for the excess U.S. taxes paid voluntarily as a result of that personal preference.
Reorganizations and International Division
Income Tax Rulings
and Interpretations Directorate
Policy and Legislation Branch
1. See Code Sec. 7701(b)(1)(A) and 7701(b)(6). Also, Joseph Isenbergh in his loose-leaf service "International Taxation -- U.S. Taxation of Foreign Persons and Foreign Income", 2nd ed.(1996), vol. 1, 3:15, states that "(i)mmigration status and tax status are now explicitly allied, and no one admitted to the United States as a permanent resident can avoid tax residence, however little
time is spent in the United States".
2. Code Sec. 7701(b)(ii) and Reg. 301.7701(b)-7.
3. U.S. citizens do not have such a choice.
4. Robertson, J.A. in the case of Stanley Coblentz v. The Queen (FCTD, decision rendered on September 30, 1996) commented that the purposes underlying Canada's tax treaties are not as limited as usually thought (namely, the elimination of double taxation and the prevention of fiscal evasion of taxes on income and capital). He then referred to David A. Ward's article "Canada's Tax Treaties" (1995) 43 Cdn. Tax J. 1719 at 1728: "It might be more accurate to say that the main or principal purpose of Canada's tax treaties is to allocate and limit taxing powers of the two Contracting States."
5. i.e., total U.S. source income of $33,000 (i.e., $5,000 + $8,000 + $20,000) at a U.S. tax rate of 40%
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