Since tax residents of Canada must report all of their foreign-source income in Canada, some of this foreign income may be taxed in two countries at the same time. In order to avoid this double taxation, Canada allows, under certain conditions and to a certain extent, to avail itself of a foreign tax credit so that taxes paid in another country are credited with our Canadian taxes. Unfortunately, the exercise can be perilous for those who improvise a specialist accountant!

Establish the source of income

First, you have to determine in which country you pay tax first and in which country you deduct the same tax. It’s not always easy to navigate when you don’t know your stuff!

For example, a Canadian who receives a dividend from a US company will deduct US taxes in Canada, but if he sells those same shares, the taxes paid on the capital gain in Canada will be deductible in the US! Some tax treaties will even provide for a reallocation of excess taxes to another country (also called “re-sourcing”), treating part of the income as coming from two different sources.

Determine the amount of credit

On the other hand, a common mistake is to take taxes withheld from income and claim them as a foreign tax credit. This is usually much more complicated because you have to determine the total tax liability and not just the withholding. Our international tax experts are used to determining the amount of foreign tax credit to which you are entitled based on the type of income, the country concerned and the tax treaties in force.

Double taxation

Despite the foreign tax credit, there are unfortunately cases where the Canadian resident pays more tax than they should. This is the case, among others, of situations where the event which generates the tax does not occur at the same time in both countries. We talk about “timing mismatch”. However, good upstream transaction planning can often prevent these unfortunate situations.

Another case concerns higher taxes in the other country compared to Canadian taxes. A taxpayer who pays more tax in another country can only reduce their Canadian tax, but the excess is not refunded. The taxpayer who would have had the same income directly from Canada will then pay less tax overall than if the same amount of income comes from another country.

Increased tax audits

In recent years, the government has dramatically increased the number of audits of tax returns claiming foreign tax credits. For some of our clients, these checks are systematic, every year.

Indeed, foreign tax credits are among the subjects most sought after by the government. We no longer count the (new) customers who come to our door with tax debts resulting from these checks. Our professionals will help you complete your tax returns so you can go through tax audits hassle-free.

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About the author

Nicolas Godbout, tax expert and financial planner, M. Fisc., Pl. Fin

Holder of a bachelor's degree in management (B. Gest.) from HEC Montréal and a master's degree in taxation (M. Fisc.) from the Université de Sherbrooke, Nicolas also completed a certificate in personal financial planning from HEC Montréal. In 2007, he successfully passed the exam of the Institut québécois de planification financière (IQPF) leading to the title of financial planner (Pl. Fin.). With more than 20 years of experience in his field, Nicolas has more than one string to his bow to effectively meet the needs of his clients in the areas of taxation, accounting services and financial planning. His personalized approach and listening skills also allow him to quickly identify what is most important to them and make the best recommendations to help them achieve their goals.