Principal Issues
Whether a part-year resident of Canada may claim a foreign tax credit (“FTC”) in respect of employment income earned outside Canada, and whether such credit is limited to the portion of foreign taxes paid during the period of Canadian residency.
Position
The starting point for determining the foreign tax credit available to a part-year resident is the total foreign taxes paid for the entire year to a particular foreign jurisdiction.
However, the actual foreign tax credit available is determined by the formula under section 126 of the Income Tax Act, and may be limited depending on the taxpayer’s specific circumstances.
Reasons
Pursuant to subsection 126(1) of the Income Tax Act (the “Act”), a taxpayer may claim a foreign tax credit in respect of non-business-income tax paid to a foreign jurisdiction.
For a part-year resident, the CRA has indicated that the computation of the foreign tax credit begins with the total foreign taxes paid for the year, as defined under subsection 126(7) of the Act.
However, the amount of the credit actually allowable is determined by applying the statutory formulas in subsections 126(1) and 126(2.1), which incorporate limitations based on:
- the net foreign income;
- the taxpayer’s total net income; and
- the proportion of foreign-source income relative to total income.
These limitations ensure that the foreign tax credit does not exceed the portion of Canadian tax otherwise payable on the foreign-source income.
The application of these formulas, including in the context of a part-year resident earning employment income, is reflected in the calculations performed on Form T2209 (Federal Foreign Tax Credits).
In addition, where employment income is earned outside Canada and subject to foreign taxation, the taxpayer may be entitled to a foreign tax credit in Canada to mitigate double taxation, consistent with the principles outlined in the Act and applicable tax treaties.
Limitations
The determination of the foreign tax credit available to a part-year resident is highly dependent on the facts of each case, including residency periods, income sources, and applicable treaty provisions.
Comments provided by the CRA in technical interpretations and roundtable responses are general in nature and do not constitute binding rulings.
Binding confirmation may only be obtained through an advance income tax ruling request submitted in accordance with CRA administrative procedures.
