REASONS
FOR JUDGMENT
Lamarre A.C.J.
[1]
This is an appeal from a reassessment made by
the Minister of National Revenue (Minister) on February 20, 2015,
whereby the foreign tax credit of CAN$867.67 the appellant had claimed in the
computation of her tax payable for the 2013 taxation year was disallowed. In so
reassessing, the Minister made the following assumptions of fact:
a) in
2013, the Appellant was a resident of Canada; (admitted)
b) in 2013, the Appellant was a citizen of the United States
of America (“US”); (admitted)
2013 US Tax Return
c) the Appellant received an IRA distribution in the amount
of $5,617.78 (USD) less taxes withheld of $561.78 (USD) from The Village Bank
in respect of the 2013 taxation year; (admitted)
d) the Appellant filed the 2013 US Tax Return; (admitted)
e) in filing the 2013 US Tax Return, in addition to other
amounts, the Appellant:
i) reported the IRA distribution in the amount of $5,617.78
(USD); (admitted)
ii) reported taxable income of $69,487.00 (USD); (admitted)
iii) reported $561.78 (USD) in respect of taxes withheld on
the IRA distribution; (admitted)
iv) claimed a foreign tax credit of $13,298.00 (USD) in
respect of her Canadian sourced income;
v) reported nil tax payable; and
vi) claimed a refund of $561.78 (USD) for tax overpaid;
f) the Appellant received a refund of the $561.78 (USD) of
tax withheld in respect of the IRA distribution; (admitted)
g) the Appellant did not pay any non-business‑income
tax to the IRS; and
Canadian Income Tax and Benefit Return
h) in filing the 2013 income tax return, in addition to
other amounts, the Appellant:
i) reported $5,785.00 of foreign non‑business‑income
in respect of the IRA distribution; and (admitted)
ii) claimed a foreign tax credit in the amount of $867.67 in
respect of the IRA distribution. (admitted)
[2]
Mr. Jack R. Bowerman, CPA, who
prepared the Canadian and American 2013 tax returns for the appellant, also
acted as her agent at the hearing before the Court.
[3]
The issue is whether the appellant is entitled
to claim a foreign tax credit in the computation of her Canadian tax for the
2013 taxation year.
[4]
The Minister submits that the appellant did not
pay any non‑business‑income tax to the Internal Revenue Service (IRS)
in 2013 (which is denied by the appellant), and so she is not entitled to a
foreign tax credit pursuant to subsections 126(1) and 126(7) of the Income
Tax Act (ITA). The relevant portions of those provisions read as
follows:
Foreign tax deduction
126 (1) A
taxpayer who was resident in Canada at any time in a taxation year may
deduct from the tax for the year otherwise payable under this Part by the
taxpayer an amount equal to
(a) such part of any non-business-income tax paid by the taxpayer
for the year to the government of a country other than Canada (except,
where the taxpayer is a corporation, any such tax or part thereof that may
reasonably be regarded as having been paid by the taxpayer in respect of income
from a share of the capital stock of a foreign affiliate of the taxpayer) as
the taxpayer may claim,
not exceeding,
however . . .
Definitions
(7) In this section,
. . .
non-business-income
tax paid by a taxpayer for a taxation year to
the government of a country other than Canada means, subject to subsections
(4.1) to (4.2), the portion of any income or profits tax paid by the
taxpayer for the year to the government of that country that
(a) was not included in computing the taxpayer’s business-income tax
for the year in respect of any business carried on by the taxpayer in any
country other than Canada,
(b) was not deductible by virtue of subsection 20(11) in computing
the taxpayer’s income for the year, and
(c) was not deducted by virtue of subsection 20(12) in computing the
taxpayer’s income for the year,
but does not
include a tax, or the portion of a tax,
(c.1) that is in respect of an amount deducted because of subsection
104(22.3) in computing the taxpayer’s business-income tax,
(d) that would not have been payable had the taxpayer not been a
citizen of that country and that cannot reasonably be regarded as attributable
to income from a source outside Canada,
(e) that may reasonably be regarded as relating to an amount that
any other person or partnership has received or is entitled to receive from
that government,
(f) that, where the taxpayer deducted an amount under subsection
122.3(1) from the taxpayer’s tax otherwise payable under this Part for the
year, may reasonably be regarded as attributable to the taxpayer’s income from
employment to the extent of the lesser of the amounts determined in respect
thereof under paragraphs 122.3(1)(c) and 122.3(1)(d) for the year,
(g) that can reasonably be attributed to a taxable capital gain or a
portion thereof in respect of which the taxpayer or a spouse or common-law
partner of the taxpayer has claimed a deduction under section 110.6, or
(h) [Repealed, 2013, c. 33, s. 13]
(i) that can reasonably
be regarded as relating to an amount that was deductible under subparagraph
110(1)(f)(i) in computing the taxpayer’s taxable income for the year; (impôt
sur le revenu ne provenant pas d’une entreprise)
[Emphasis
added.]
[5]
The appellant argues that she was entitled to
claim against her Canadian tax payable for 2013 a foreign tax credit of CAN$867.67,
which is equivalent to 15% of her U.S.‑sourced income (a periodic pension
payment received from an individual retirement account (IRA) distribution in
the amount of US$5,617.78), in accordance with Article XVIII (paragraphs 1
and 2(a)) and Article XXIV (paragraphs 2(a), 4 and 6) of the 1984 Convention
Between Canada and the United States of America With Respect to Taxes on Income
and on Capital (treaty), S.C. 1984, c. 20. Those provisions
read as follows:
ARTICLE XVIII
Pensions and Annuities
1 Pensions and annuities arising in a Contracting State and paid to
a resident of the other Contracting State may be taxed in that other State, but
the amount of any pension included in income for the purposes of taxation in
that other State shall not exceed the amount that would be included in the
first-mentioned State if the recipient were a resident thereof.
2 However:
(a) Pensions may also be taxed in the
Contracting State in which they arise and according to the laws of that State;
but if a resident of the other Contracting State is the beneficial owner of a
periodic pension payment, the tax so charged shall not exceed 15 per cent of
the gross amount of such payment; and
. . .
ARTICLE XXIV
Elimination of Double Taxation
. . .
2. In the case
of Canada, subject to the provisions of paragraphs 4, 5 and 6, double
taxation shall be avoided as follows:
(a) Subject to the provisions of the law of Canada regarding the
deduction from tax payable in Canada of tax paid in a territory outside Canada
and to any subsequent modification of those provisions (which shall not affect
the general principle hereof),
(i) income tax paid or accrued to the United States on profits,
income or gains arising in the United States, and
(ii) in the case of an individual, any social security taxes paid to
the United States (other than taxes relating to unemployment insurance
benefits) by the individual on such profits, income or gains
shall be deducted from any Canadian tax payable in respect of such profits, income or gains;
. . .
4. Where a
United States citizen is a resident of Canada, the following rules shall apply:
(a) Canada shall allow a deduction from the Canadian tax in
respect of income tax paid or accrued to the United States in respect of
profits, income or gains which arise (within the meaning of paragraph 3) in the
United States, except that such deduction need not exceed the amount of the
tax that would be paid to the United States if the resident were not a United
States citizen; and
(b) For the purposes of computing the United States tax, the
United States shall allow as a credit against United States tax the income tax
paid or accrued to Canada after the deduction referred to in subparagraph (a).
The credit so allowed shall not reduce that portion of the United States tax
that is deductible from Canadian tax in accordance with subparagraph (a).
. . .
6. Where a United States citizen is a resident of
Canada, items of income referred to in paragraph 4 or 5 shall,
notwithstanding the provisions of paragraph 3, be deemed to arise in Canada
to the extent necessary to avoid the double taxation of such income under
paragraph 4(b) or paragraph 5(c).
[Emphasis
added.]
[6]
The appellant declared in her 1040 U.S.
Individual Income Tax Return for 2013 adjusted gross income of US$79,487, which
included the total IRA distribution amount of US$5,618, which arose in the
United States, received by her in that year. When she withdrew that amount, U.S.
federal income tax of US$562 was withheld. The balance of the income declared
by the appellant arose in Canada.
[7]
In her U.S. tax return, tax of US$13,298 was
calculated, but the total tax payable was nil after deduction of a foreign tax
credit of the same amount. The federal tax withheld on the IRA distribution was
refunded to the appellant. (IRS Tax Return Transcript for the 2013 tax period, Exhibit A‑1,
Tab 3, document #1.)
[8]
According to the IRS Account Transcript for the 2013
tax period, issued on August 6, 2013 (Exhibit A‑1, Tab 3,
document #2), which provides a summary of the appellant’s tax return and of
subsequent actions taken (including corrections made by the IRS to the original
return), the account balance plus accruals of tax after the closure of the
examination of the tax return was nil.
[9]
In filing her Canadian tax return, the appellant
claimed a foreign tax credit in the amount of $867.87 against her Canadian tax
as if the United States had collected the 15% tax that it was entitled to levy pursuant
to Article XVIII of the treaty.
[10]
However, it appears that, in filing her tax
return in the United States, the appellant treated the total amount of the U.S.‑sourced
IRA distribution as being deemed to be sourced in Canada pursuant to paragraph 6
of Article XXIV of the treaty. As a result, she claimed a foreign tax
credit in the United States as though she had paid Canadian tax on the full
amount (US$5,617.78) of the IRA distribution. Thus she did not pay any U.S. tax
on that amount, and the IRS, for some reason, did not make any corrections in
this regard and therefore accepted the return as filed. In the end, no U.S. tax
was paid on that pension income.
[11]
It is my understanding that, had the appellant
properly interpreted paragraph 6 of Article XXIV of the treaty, the
portion of the IRA distribution income that should have been deemed to be
sourced in Canada would only have been that portion on which U.S. tax exceeding
15% would have been levied.
[12]
Thus, the appellant would normally have paid to
the U.S. government 15% of the amount received from the IRA distribution
(15% X US$5,617.78), as provided in Article XVIII of the treaty, for
which she would have been entitled to a foreign tax credit in the computation
of her tax in Canada.
[13]
If the U.S. tax levied had exceeded 15%, the
appellant would have had the right to claim in the computation of her U.S. tax a
foreign tax credit for the tax paid in Canada in excess of 15% on the basis
that the excess tax was levied on income deemed to be sourced in Canada by the application
of paragraph 6 of Article XXIV of the treaty.
[14]
In simpler terms, when a U.S. citizen who is
also resident in Canada earns pension income the source of which is in the United
States, under the treaty the United States is allowed to tax the first 15% of
that income, and the excess is taxable in Canada. This is why, to avoid double
taxation, a taxpayer is allowed, in computing the Canadian tax, to claim a
foreign tax credit for the 15% tax paid in the United States, and that taxpayer
is entitled to a foreign tax credit against his U.S. tax for the tax paid in
Canada over and above 15%.
[15]
Now, as mentioned previously, in filing her U.S.
tax return for the year 2013, the appellant treated the total amount received
from the IRA distribution as being sourced and taxable in Canada and she accordingly
claimed a foreign tax credit against her U.S. tax payable as though she had
paid tax in Canada on the total amount and not just on the portion on which tax
over 15% was levied. As a consequence, she did not pay any tax in the United
States, and the IRS accepted the return as filed and did not make any
corrections after having reviewed it (Exhibit A‑1, Tab 3,
document #2).
[16]
Paragraph 126(1)(a) of the ITA provides
that a Canadian resident may deduct from the tax for the year otherwise payable
an amount equal to the non‑business‑income tax paid by the taxpayer
to the government of another country.
[17]
The appellant argued that the amount of tax paid
is the amount of tax that is calculated prior to the deduction of the foreign
tax credit (in the present case, the U.S. tax before the deduction of the foreign
tax credit was US$13,298).
[18]
In Zhang v. The Q ueen,
2007 TCC 634, 2007 DTC 1744, aff’d. by 2008 FCA 198, 2008 DTC
6458, the non‑business‑income tax paid within the meaning of
paragraph 126(1)(a) of the ITA was determined to be the amount of the levy
ultimately imposed upon the appellant by the authority of the United States
government by the operation of its tax legislation, which, in that particular
case, was the total tax payable after deduction of the child tax credit.
[19]
In the present case, there was no tax or levy
ultimately imposed upon the appellant by the U.S. government after the
deduction of the foreign tax credit.
[20]
As stated in Zhang (TCC), supra,
at paragraph 10, the purpose of the foreign tax credit is to prevent
double taxation.
[21]
Here, since no taxes were paid, nor did any accrue,
according to the IRS Account Transcript for the year 2013, the treaty does not
come into play as no double taxation has occurred.
[22]
It follows that no amount was deductible under
the provisions of paragraph 126(1)(a) of the ITA.
[23]
The appeal is dismissed.
Signed at Ottawa,
Canada, this 6th day of December 2016.
“Lucie Lamarre”
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