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
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
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.
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
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%
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1996
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1996