Citation: 2007TCC634
Date: 20071024
Docket: 2005-3867(IT)I
BETWEEN:
WENCHENG ZHANG,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENT
Sheridan, J.
[1] The Appellant,
Wencheng Zhang, is appealing the assessment of the Minister of National Revenue
of his 2002 taxation year.
[2] The issue is the amount
of the foreign tax credit the Appellant ought to be allowed to claim in respect
of tax paid on his employment income in the United States.
[3] The Appellant
proposed Mr. Max Koss, a Certified Public Accountant,
as an expert witness to testify in support of his interpretation of the
applicable provisions of the United
States tax legislation. The Respondent
challenged Mr. Koss' competence to prove foreign law on the basis that he
was an accountant, not a lawyer. That in itself, however, is not sufficient to
disqualify Mr. Koss as an expert witness as that determination will depend
on the factual context of each case. Counsel for the Respondent cross-examined Mr. Koss
extensively on his credentials. Given that this appeal was heard under the
Informal Procedure and being satisfied that Mr. Koss was experienced with the
practical operation of the relevant United
States tax provisions, I ultimately
qualified Mr. Koss as an expert witness. It became clear during his
testimony, however, that Mr. Koss was not able to provide a legal analysis of
the legislation or to express a useful opinion as to its proper interpretation.
The provisions themselves were not in evidence. Thus, with the exception of his
practical knowledge from an accounting perspective as mentioned above, I gave
very little weight to Mr. Koss' evidence.
[4] Although the
parties disagree with their interpretation, the facts assumed by the Minister
in making the assessment are not in dispute:
19. In so
reassessing the Appellant's income tax return for the 2002 taxation year and in
confirming said reassessment, the Minister relied on the following assumptions
of fact:
a) at all relevant times, the Appellant was a Canadian
resident that resided in Windsor Ontario and was employed in Southfield Michigan
U.S.A.;
b) on his T-1 return for the 2002 taxation year, the Appellant
duly reported other income of $104,529.19 based on the following computation:
|
- total employment earnings -
|
$ 66,566.38
|
|
- converted to Canadian
currency
|
x $
1.5704
|
|
=
|
$104,529.19
|
c) in accordance with the "W-2 slip – Wage and Tax
Statement", the Appellant's employer withheld the following amounts:
|
- Federal income tax -
|
$7,299.27
|
|
- Social security tax -
|
4,127.12
|
|
- Medicare tax -
|
965.21
|
|
- State income tax -
|
2,263.20;
|
d) the Appellant filed a U.S. 1040A Individual tax return for
the year 2002 and completed page 2 in the following manner:
|
- Tax including any
alternative minimum tax -
|
$5,959.00
|
|
- less: Child tax credit -
|
(1,800.00)
|
|
- total tax -
|
4,159.00
|
|
less: federal income tax
withheld -
|
(7,229.00)
|
|
Amount refunded to Appellant -
|
$3,070.00;
|
[Emphasis as it
appeared in the Reply to the Notice of Appeal.]
e) the Appellant filed a 2002 Michigan state Mi-1040 tax
return for the year 2002 and completed page 2 in the following manner:
|
- Income Tax -
|
$2,040.00
|
|
- less: Michigan tax withheld -
|
(2,263.00)
|
|
- Amount refund to Appellant -
|
$ 223.00;
|
and
f) the foreign taxes paid in the amount of $17,730.78 used by
the Minister in computing the foreign tax credit as referred to in paragraph 9
herein were computed based on the following:
|
- federal tax paid per U.S.
1040 return -
|
$ 4,159.00
|
|
- state tax per State 1040
return -
|
2,040.00
|
|
- social security tax withheld
-
|
4,127.12
|
|
- medicare tax withheld -
|
965.21
|
|
- sub total -
|
$11,291.33
|
|
- exchange rate to Canadian
currency -
|
x 1.5704
|
|
-
|
$17,730.78
|
[5] In filing his 2002
income tax return, the Appellant claimed a foreign tax credit pursuant to
section 126(1) of the Income Tax Act:
SECTION 126: Foreign
tax deduction.
(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,
...
[6] The phrase in
issue in the above provision is "non-business income tax paid" by the
Appellant within the meaning of paragraph 126(1)(a).
[7] There is no
dispute that entitlement to the Child Tax Benefit, the calculation of the
amount payable to a taxpayer and the payment of that amount is governed by the United States
tax legislation. Pursuant to the relevant provisions, where a taxpayer is
entitled to a Child Tax Benefit, it must first be applied to the taxpayer's
outstanding tax liability. The remaining balance, if any, of the Child Tax
Credit is then "refunded" to the taxpayer. The relevant portion of
the Appellant's 2002 United States federal income tax return was reproduced in Exhibit
A-2:
|
28
|
Tax, including any alternative
minimum tax (see instructions)
................................
|
28
|
5,959.
|
|
29
|
Credit for child and dependent care expenses
Attach Schedule 2 ................
|
29
|
|
|
|
30
|
Credit for the elderly or the disabled.
Attach Schedule 3 ................
|
30
|
|
|
|
31
|
Education credits.
Attach Form 8863 ................
|
31
|
|
|
|
32
|
Retirement savings contributions credit.
Attach Form 8880 ................
|
32
|
|
|
|
33
|
Child tax credit
(see instructions) ..................
|
33
|
1,800.
|
|
|
|
34
|
Adoption credit.
Attach Form 8839 ................
|
34
|
|
|
|
35
|
Add lines 29 through 34.
These are your total credits
....................................
|
35
|
1,800.
|
|
36
|
Subtract line 35 from line 28.
If line 35 is more than line 28, enter 0
.......................
|
36
|
4,159.
|
|
37
|
Advance earned income credit payments from
Form(s) W-2 ......................................................
|
37
|
|
|
38
|
Add lines 36 and 37. This is your total tax ..............>
|
38
|
4,159.
|
|
39
|
Federal income tax withheld from Forms W-2 and 1099 ....
|
39
|
7,229.
|
|
|
|
40
|
2002 estimated tax payments and amount applied from
2001 return .........................
|
40
|
|
|
|
41
|
Earned income credit
(EIC) ...............................
|
41
|
|
|
|
42
|
Additional child tax credit.
Attach Form 8812 ................
|
42
|
|
|
|
43
|
Add lines 39 through 42.
These are your total payments ..............................>
|
43
|
7,229.
|
|
44
|
If line 43 is more than line 38, subtract line 38 from
line 43. This is the amount you overpaid ........................
|
44
|
3,070.
|
|
45a
|
Amount of line 44 you want refunded to you ............>
|
45a
|
3,070.
|
|
|
|
|
|
|
|
[8] According to the
Appellant, he ought to be able to claim $5,959, the amount shown in Line 28 as "tax",
before the application of the Child Tax Credit. Under the tax legislation of
the United States, he was obligated to pay this amount; by the same
law, he was required to apply to that figure any Child Tax Benefit amount
payable to him as well as the taxes already deducted at source. But his tax
liability was nonetheless, $5,959 and accordingly, that is the amount he ought
to be able to claim under paragraph 126(1)(a) of the Act.
[9] The Minister
argues that paragraph 126(1)(a) limits the amount of the foreign tax
credit to the amount of tax actually paid by the taxpayer. Referring to the
above calculations, the Respondent argues that "tax" of $5,959 set
out in Line 28 does not represent the tax actually paid by the Appellant. By
operation of the United States tax legislation, this amount was reduced by $1,800
following the application of the Child Tax Credit amount to which the Appellant
was entitled in 2002. As shown in Lines 36 and 38 above, this left a "total
tax" owing of $4,159. This amount was then subtracted from the federal
income tax of $7,229 already withheld from the Appellant's 2002 employment
income, resulting in a refund to the Appellant of $3,070. This amount is equal
to the sum of $1,800, the maximum Child Tax Credit payable to the Appellant in
2002, and $1,270 ($7,229 - $5,959), the amount of the overpayment of taxes
withheld at source for that year. I note that this amount is described in Line
44 as "the amount you [the taxpayer] overpaid". Accordingly, the
amount of "non‑business income tax paid" by the Appellant, within
the meaning of paragraph 126(1)(a), was $4,159.
[10] In my view, the
Respondent's interpretation is the correct one. The purpose of the foreign tax
credit is to prevent double taxation by permitting a deduction from a taxpayer's tax
liability in Canada an amount equal to the income tax paid "to the
government of a country other than Canada". A "tax" is a "… a levy,
enforceable by law imposed under the authority of a legislature, imposed by a
public body and levied for public purpose".
In the present case, the amount of the levy ultimately imposed upon the Appellant
by the authority of the United States government by operation of its tax legislation was
$4,159. From this it follows that only this amount is deductible under the
provisions of paragraph 126(1)(a) of the Act. Accordingly,
the appeal is dismissed.
Signed at
Ottawa, Canada, this 24th day of October, 2007.
"G. A. Sheridan"
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