Overview
These CRA interpretations address how the Foreign Tax Credit (FTC) applies in situations involving:
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Canadian residents earning employment income in another country (e.g., the U.S.)
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Payroll withholding obligations by non-resident employers
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Dual-status or part-year residents filing a Canadian return for only part of the year
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How foreign tax paid must be allocated for FTC purposes
The rulings clarify how subsections of s.126, residency rules, and withholding obligations interact when employment income is earned abroad.
1. FTC on Employment Income Earned Outside Canada
When a Canadian resident earns employment income in another country:
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The income remains taxable in Canada, whether or not foreign tax was paid.
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Foreign tax paid on that same employment income may be eligible for the Foreign Tax Credit under s.126(1).
Key CRA Points:
Foreign tax must be legally payable
If the foreign tax was not legally required, Canada will not grant an FTC.
FTC cannot exceed the Canadian tax otherwise payable
The FTC is limited to the portion of Canadian tax reasonably attributable to that same foreign-source income.
Employer withholding does not change source
Even if foreign taxes are withheld in error, the employment income is still considered foreign source for FTC purposes.
2. Employer Withholding Obligations for Cross-Border Employees
This ruling clarifies that:
A Canadian resident working in the U.S. is still taxable in Canada
Even if all employment duties are performed outside Canada, Canadian residency triggers worldwide tax.
Canadian employers must withhold Canadian payroll tax if:
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The employee is a resident of Canada, and
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No valid Regulation 102 waiver exists.
If the employee has U.S. tax withheld, CRA notes that:
FTC may offset Canadian tax on the same income
But only up to the Canadian tax otherwise payable.
Excess foreign tax is not refundable in Canada.
3. Non-Resident Employer Withholding & FTC Interaction
(Based on 2012-0436311I7)
This ruling revises CRA’s administrative approach to Canadian payroll withholding for non-resident employers.
CRA confirms:
A non-resident employer must withhold Canadian tax if:
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The employee is a Canadian resident, and
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The employee performs services physically in Canada, and
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No Reg. 102 waiver is granted.
Where foreign taxes are withheld on the same income:
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An FTC may apply under s.126(1)
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The FTC cannot exceed the Canadian tax otherwise payable
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The FTC is claimed only by the employee, not the employer
CRA’s administrative relief
For certain cases involving non-resident employers, CRA may allow reduced withholding or waivers, but this does not change FTC rules.
4. FTC for Part-Year Residents
(Based on 2013-0480311C6)
This ruling focuses on how the Foreign Tax Credit applies when a taxpayer is resident in Canada for only part of a taxation year.
Under Canadian tax law:
Part-year residents are taxed on:
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Canadian-source income for the entire year
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Worldwide income for the resident portion of the year only
CRA Clarifies the Following:
A. FTC Applies Only to Income Earned During Canadian Residency
Foreign taxes paid on income earned before or after residency cannot be used to claim an FTC.
B. FTC Must Be Prorated Based on Residency Period
Only the foreign tax relating to the resident portion of the year can be included in the FTC calculation.
C. FTC must be calculated separately for:
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Income taxable in Canada during residency, and
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Foreign tax that relates to that same period
D. FTC cannot be carried backward or forward
The CRA confirms that s.126(1) does not allow carryovers for part-year residents.
Disclaimer
This page summarizes CRA technical interpretations 2010-0355551E5, 2010-0383561I7, 2012-0436311I7, and 2013-0480311C6, which may not represent current CRA policy. This material is for general informational purposes only and does not constitute tax, legal, or accounting advice.
Redaction Notice
All names, personal identifiers, internal CRA contact details, and confidential taxpayer information have been removed.
