20 June 2023 STEP Roundtable Q. 18, 2023-0966631C6 - Foreign Tax Credit Verification and Delays

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: Whether CRA would accept the filing of foreign tax returns (with filing confirmation) and proper calculation of FTC as appropriate support for the claim of FTC.

Position: Response provided by CVB. The foreign tax return and proper calculation of the FTC alone are not sufficient and are to be submitted along with proof payment of the final tax liability.

Reasons: Before an amount of foreign tax (i.e. business-income tax and non-business income tax) can be used in the calculation of the FTC, the Income Tax Act provides that the amount must be “paid” by the taxpayer for the year. It is the CRA’s longstanding position that the FTC is dependent on a confirmed final tax liability with a foreign tax authority. The supporting documents requested by the CRA are proof of payment of that confirmed final tax liability.

2023 STEP CRA Roundtable – June 20, 2023
QUESTION 18. Foreign Tax Credit Verification and Delays

The CRA appears to be engaged in substantive pre or post-assessing review of foreign tax credit (FTC) claims made by individual taxpayers.

Unfortunately, there are often timing issues with being able to provide sufficient evidence to the CRA to substantiate such a claim. For example, the US returns of a US citizen resident in Canada (who is required to file a US personal income tax return (“US tax return”) with US source income that generates US taxes payable) will often not show up in the US “transcript” system for quite some time after the filing of a Canadian personal income tax return (“Canadian tax return”). This may lead to the CRA denying the FTC claim until such time that the US transcript is available. In those circumstances, taxpayers and their advisors are forced to file amendments to such assessed returns or to timely file a notice of objection to protect the taxpayer’s rights.

Consider an example for the taxation year 2020 of a Canadian Taxpayer X, a US citizen resident in Canada. In Mr. X’s situation, his Canadian tax return was timely filed by April 30, 2021, with significant FTC claims for US tax paid for 2020. His US tax return was filed much later in the year (because of various US filing extensions that were available to Mr. X) on or before October 15, 2021, with the IRS. The amount of US tax paid for 2020 on his filed US tax return matched the appropriate FTC claim on his 2020 filed Canadian tax return.

In this example, the US transcripts were not available until late in 2022. This resulted in the CRA denying the FTC claim on the 2020 filed Canadian tax return. And to protect the taxpayer’s rights, a timely notice of objection (NOO) was filed and initially dealt with by CRA Appeals.

However, some of our members have recently been in discussions with CRA Appeals who have informed our members that they are fast tracking NOOs for FTC claims to “confirm” the assessments, with “direction” to file an amendment when the information is available. This is what happened with Mr. X above. It would appear that the Minister’s assumption is that in the absence of substantive audit level evidence, no foreign taxes are paid in respect of the year. This approach appears counter to our system of self-reporting with FTC claims based upon filing of foreign jurisdiction tax returns as evidence.

As a consequence, multi-year delays may arise in the proper processing of FTC claims.

Given the above, would the CRA consider acceptance of the filing of foreign tax returns (with filing confirmation) and proper calculation of FTC as appropriate support?

CRA Response

The CRA tries to conduct its review activities fairly and find and maintain a balance between the need to review tax returns and the concern of causing an undue burden on taxpayers. It is important to note that a review is not a tax audit. In most cases, it is simply a routine check to ensure the information provided is correct. Further, the CRA does not consider the review of an income tax and benefit return to be a negative reflection of a taxpayer’s integrity. While some returns are chosen at random, the majority are selected based on a risk-based scoring system. This system is designed to incorporate multiple factors to identify those returns that carry the highest potential for inaccuracy. One of the claims identified as having a high potential for inaccuracy is the Foreign Tax Credit (FTC).

Before a taxpayer is asked to provide supporting documents to confirm the individual’s eligibility to claim a FTC, the CRA first refers to the information available on file. If more information is needed, or if unable to resolve the discrepancy internally, the CRA sends a request for information and supporting documents to confirm and substantiate the taxpayer’s claim.

The information and supporting documents required to substantiate a claim for a FTC include the federal, state, and municipal tax returns and all associated schedules, income slips and forms, a copy of the federal account transcript, and an account statement or similar document from the state and/or municipal tax authority. A breakdown by income type (for example, employment income, interest, dividends, capital gains), country and recipient is also required. We also need to know if the taxpayer filed a joint return with their spouse or common-law partner.

Individuals who have difficulty getting the documents and need more time are encouraged to contact the CRA as soon as possible.

Before an amount of foreign tax (i.e. business-income tax and non-business income tax) can be used in the calculation of the FTC, the Act provides that the amount must be “paid” by the taxpayer for the year. It is the CRA’s longstanding position that the FTC is dependent on a confirmed final tax liability with a foreign tax authority. The supporting documents requested by the CRA are proof of payment of that confirmed final tax liability. The foreign tax return and proper calculation of the FTC are still required, but they are to be submitted along with the other requested documents and proof of payment of the final tax liability.

The CRA understands that a notice of assessment, transcript, statement, or other official document from the applicable tax authority indicating the foreign income and final tax liability is not always available. In general when this situation arises, the CRA will accept proof of payment made to or refund from the foreign tax authority. Proof of payment can include bank statements, cancelled cheques, or official receipts that clearly indicate:

• the payment was made to or received from the applicable foreign tax authority
• the amount of the payment or refund
• the tax year to which the payment or refund applies; and
• the date that the amount was paid or received

Amounts documented on a W-2 slip from the employer may serve as proof of employment income earned, Social Security tax and Medicare tax withheld, and tax submitted to the IRS. The amount on the W-2 does not establish the amount of the final income tax liability.

Guylaine Gladu
2023-096663