A foreign tax credit is available to any taxpayer who has been a resident of Canada and earned worldwide income at any time during the tax year. The income can be from employment earnings, business or rental income, investment income, or a pension from another country. The case study that follows highlights a typical issue that many Expats in Toronto come across.
Introduction:
Residents of Canada are subject to income tax everywhere over the world. If you receive income from a foreign source, you must pay taxes on both your Canadian and overseas earnings. Since you must pay taxes in both Canada and the foreign country, this doubles your tax liabilities (if applicable). The Foreign Tax Credit offered by the Canada Revenue Agency (CRA) relieves Canadians who are subject to double taxation. This makes it simpler and lowers the amount of tax that a Canadian resident must pay. Once someone is eligible for the Foreign Tax Credit, the taxes they have already paid abroad can be deducted from their Canadian tax obligations.
Problem:
Both clients in need are Canadian citizens who earn an income in the United States. Both clients must pay taxes in both the United States and Canada, leading to a huge taxable income. When they filed their Canadian taxes, they claimed the FTC for the tax they had paid in the United States. After receiving the NOA, they received a review letter from CRA requesting additional information. This can be frightening at first, but don’t worry! To address your FTC issues, contact a Toronto Cross-border Tax Accountant now.
The CRA review letter for FTCs typically requests further supporting documentation and verification that the taxpayer paid the amount claimed in the foreign country. The letter requests a variety of documents and forms to support your claims and includes a deadline that must be met to avoid penalties. Form T2209, Federal International Tax Credits, is an often-requested form that details all foreign income and tax liabilities. The CRA also asks for information slips, tax receipts, notices of assessments, and any other documents that prove you paid the tax being claimed and that it is qualified for the FTC.
Analysis:
When SDG became aware of the issue, our first action was to thoroughly read the letter and understand the situation. It is critical to go over the tax return being reviewed to ensure that no information is missing and that no errors were made in the filing. The clients were really concerned at this time because of the long delay for their refund as well as the fear that their tax liability would increase. SDG, on the other hand, was able to calm them down by exposing them to our go-to solution for these issues. It is a much shorter and simpler approach than what other Toronto firms provide. Our solution is considerably simpler and faster for FTC audits.
Results:
It took a few weeks for the return to be reviewed once the documents were submitted to the CRA. However, the issue was quickly concluded after the CRA received all of the necessary proof to substantiate the foreign income tax paid to the US. When the review was over, the client was delighted and pleased with how simple and quick it was to solve the problem. Other accountants will keep you waiting for weeks, whereas SDG gets the work done much faster.
Please contact us if you are currently experiencing this or any other cross-border tax issue. We have a number of solutions for our clients’ cross-border and FTC tax concerns, and we are always happy to help. To get started, contact SDG today or schedule a free initial consultation.
The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situations.
— Sami Ghaith
CPA, CGA, MBA
