Claiming a foreign tax credit proves to be a bit dicey for one taxpayer

Abstract

Claiming a foreign tax credit is the primary way Canadian residents can avoid paying double tax on foreign income, but the ability to claim a foreign tax credit is not always straightforward since it depends on what is actually considered to be a foreign tax. To avoid paying double tax on the same income, you may be entitled to claim a foreign tax credit on your Canadian return for foreign taxes paid on that foreign income. The judge concluded that the amounts collected by the Spanish government did "Not meet the definition of a tax, in that they were not collected for a public interest The pension deductions were made by the Spanish government for the future benefit of the contributor These payments were not made in order to generate income for the state." As a result, these amounts did not qualify for foreign tax credits. In a 2001 tax case, contributions a Canadian taxpayer paid to a national insurance plan in the United Kingdom were also found not to be eligible for the foreign tax credit. A similar conclusion was reached again by the Tax Court in a 2019 decision, which held that contributions to a foreign insurance plan are not a tax for public purposes, partly because the contributor receives "a direct personal and financial benefit in the future for their contributions." One final caution when it comes to claiming foreign tax credits. As noted above, a foreign tax credit for withholding tax on investment income is only available when those investments are held in a non-registered account. The one exception to the above is for U.S. stocks held in an RRSP or RRIF. Because of a unique provision in the Canada-U.S. tax treaty, there is an exemption from withholding tax that is automatically applied when U.S. dividends are paid to an RRSP or RRIF. Note that this same break does not apply to U.S. dividends paid to a TFSA or RESP. That's because these accounts are not "Operated exclusively to administer or provide pension, retirement or employee benefits," which is the requirement under the Canada-U.S. treaty to be exempt from withholding tax.