Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Why has CRA changed its administrative practice as it relates to the support required for foreign tax credits in respect of US tax?
Position: Response provided by CVB.
Reasons: See below.
Author: Panourgias, Marina
STEP CRA Roundtable – June 10, 2016
Question 9. Support for U.S. foreign tax credit claims
Recently, many practitioners and / or Canadian taxpayers have been receiving requests from the CRA to obtain a transcript from the United States Internal Revenue Service to the extent that foreign tax credits were claimed in respect of US tax paid that corresponds to the filing of a US tax return. However, getting a transcript from the IRS for taxpayers living outside the US isn’t as straightforward as logging onto CRA My Account. Can the CRA comment on why this seems to be an administrative change and whether it would consider not requiring transcripts from the IRS to support a foreign tax credit claim?
Since the Canadian tax system functions on the basis of self-assessment, the Canada Revenue Agency (CRA) conducts reviews every year as a means of ensuring that income is properly reported and that expenses, deductions, and credits are correctly claimed in accordance with the provisions of the Act.
The CRA neither targets nor excludes any specific category of people when reviewing returns. It uses a sophisticated scoring system to select returns for review. This system is designed to incorporate multiple factors to identify those returns that carry the highest potential for inaccuracy of certain claims. In addition, some returns are chosen for review at random. One of the claims identified as having a high potential for inaccuracy is the foreign tax credit.
In 2015, a decision was made to change the requirements for acceptable supporting documents related to claims for the foreign tax credit made by individuals with U.S. source income. This decision was made in response to an observed increase in the trend of incorrect reporting and incomplete submission of documents relating to this type of income. It should be noted that for all other countries, the CRA has always required a copy of the taxpayer’s foreign income tax return and assessment notice or equivalent document from the foreign tax authority. To be equitable in our treatment of all taxpayers, it was determined that the best course of action was to require the same level of proof from individuals reporting U.S. source income that we require from individuals reporting foreign source income from other countries.
The documents necessary to support a claim for taxes paid in the U.S. are noted on Form T2209, Federal Foreign Tax Credits. These documents include but are not limited to federal, state, and municipal tax returns and all associated schedules and forms, a copy of the federal account transcript, and an account statement or similar document from the state and/or municipal tax authority. A breakdown by income type (for example, interest, dividends, capital gains), country and recipient is also required if the taxpayer filed a joint return with their spouse or common-law partner.
In response to feedback received, the CRA has decided to offer the following option to support a claim for the federal foreign tax credit:
* If you are unable to provide a copy of a notice of assessment, transcript, statement, or other document from the applicable foreign tax authority indicating your client’s foreign income and final tax liability, we will accept proof of payment made to or refund received from them.
This may be in the form of bank statements, cancelled cheques, or official receipts. The following information has to be clearly indicated:
o that the payment was made to or received from the applicable foreign tax authority;
o the amount of the payment or refund;
o the tax year to which the payment or refund applies;
o the date that the amount was paid or received.
Note: If you are submitting photocopies of a cancelled cheque, you will need to copy both sides of the cheque unless the front has been micro-encoded by the banking institution.
The CRA realizes that the changes made to its requirements in respect of supporting documents for the foreign tax credit related to U.S. source income were new in 2015, and acknowledges that there was an understandable transition period for taxpayers and their representatives in this regard. Since we are now almost one year later, there is a certain level of expectation that a more pro-active approach will be adopted to ensure that the required documents are requested or obtained in anticipation of a possible review by the CRA.
It is recommended that taxpayers and their representatives not wait until CRA asks for supporting documents before requesting them. According to the IRS website “Most requests will be processed within 10 business days”. If a request for the account transcript is made promptly, there would be a reduction or elimination of issues related to the timeframe for submitting a copy if the CRA asks for documentation.
Based on our findings, the IRS has a very structured process for requesting tax account transcripts online or through the mail using Form 4506-T. Information about requesting transcripts from the IRS is available on their website at https://www.irs.gov/Individuals/Get-Transcript-FAQs. In addition, the majority of the U.S. states have an online system which allows the taxpayer to print his/her “account statement” which would confirm the taxpayer’s final tax liability.
It should also be noted that if additional time is needed to respond to a request for supporting documents, an extension may be requested.
Marina Panourgias (for CVB)
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