Good News: Supporting Your Foreign Tax Credit Claim Just Got Easier

As global mobility continues to increase, more Canadians are earning income from a variety of international sources, which is generally subject to tax in both those jurisdictions. Since the CRA requires this income to be reported on a tax return each year, double taxation situations could arise where the taxpayer is paying taxes in both countries on one source of income.

Difficulties in claiming a Foreign Tax Credit

If you’re a Canadian resident earning income from an international source, you can generally rely on tax treaties with other countries to alleviate double taxation by claiming a foreign tax credit (FTC) on your Canadian tax returns. To claim an FTC on a Canadian tax return, the CRA requires you to submit supporting documentation of the final tax liability from the foreign tax authority. Until now, supporting a claim for an FTC has proved difficult for many Canadian residents due to the onerous nature of obtaining and submitting supporting documentation.

Individuals with US filing requirements will understand there are often timing or other issues in respect of supporting documentation for FTC claims. For example, the IRS doesn’t issue notices of assessment, and instead provides account transcripts. Since US returns can be extended, the supporting documentation or transcripts are often not available until much later than the Canadian tax return is filed. As a result, often the CRA will disallow the FTC until the supporting transcripts are available, causing processing delays or requiring taxpayers to file amended returns or Notices of Objections to alleviate the double taxation.

The good news: Update from the CRA on claiming an FTC

Recently, this issue was posed as a question to the CRA at the June 2023 STEP Roundtable[1]. When asked how taxpayers could support their FTC’s to ease processing delays, the CRA indicated that, in the absence of an assessment or other official document from the foreign tax authority, they will consider other sources as proof of payment. These sources could include:

• Bank statements showing receipt of a refund or payment of tax;
• Cancelled cheques showing payment to foreign tax authorities; or,
• Official receipts from foreign tax authorities

The CRA also indicated that the alternative source needs to show:

• Payment being made to, or a refund being received from, the foreign tax authority;
• The amount and date of the payment (or receipt); and,
• The relevant tax year

Going forward, these alternative sources to prove payment of the final tax liability will enable Canadian taxpayers to use such documentation to reduce delays or eliminate the need to file an amended return or objection with respect to their foreign tax credits.

If you have questions about your foreign tax credit claim or how to support it, reach out to your DMCL advisor and they’ll help ensure you have the right supporting documentation for a successful claim.

Article written by Tara Hauck, CPA, CA, TEP

[1] 2023 STEP CRA Roundtable, Question 18, June 20, 2023