2016-0660421E5 Foreign tax credit – former resident

Principal Issues: Does subparagraph 152(4)(a)(ii) of the Act allow a taxpayer to file a waiver for an emigration year for the purpose of keeping the taxation year open indefinitely to allow the taxpayer to claim a foreign tax credit under subsection 126(2.21) beyond the statutory limits imposed under paragraph 152(4)(b)?

Position: Any decision to reassess a taxpayer’s return where a waiver is filed is discretionary and dependent on the facts and circumstances of the particular taxpayer. In the situation described herein, a waiver request filed by a taxpayer to keep the emigration year open may be considered appropriate to allow a reassessment beyond the statutory reassessment period referred to in paragraph 152(4)(b) where the circumstances to support this foreign tax credit (e.g., disposition and/or foreign taxes paid) are present within this period.

Reasons: The reassessment of a return of income for the emigration year to claim a foreign tax credit under subsection 126(2.21) is restricted to the statutory period referred to in paragraph 152(4)(b). The waiver referred to in subparagraph 152(4)(a)(ii) and paragraph 152(4)(c) of the Act is not intended to keep a taxation year open indefinitely in order to claim this foreign tax credit.

Author: Agarwal, Lata
Section: 126(2.21), 152(4)(b) and (c), 152(4.01), 152(6)(f.1)

XXXXXXXXXX                                                                                                 2016-066042
                                                                                                                         L. Agarwal, CPA, CMA, MBA
October 11, 2017

Dear XXXXXXXXXX:

Re: Foreign tax credit – former resident

This letter is in response to your emails dated July 4, 2016 and August 4, 2016, in which you seek clarification regarding the period within which the Minister may assess or reassess a taxpayer’s return of income with respect to a claim for a foreign tax credit under subsection 126(2.21) of the Income Tax Act (“Act”). We also acknowledge your phone discussions with us (Young/XXXXXXXXXX and Agarwal/XXXXXXXXXX). We apologize for the delay in responding.

Pursuant to the information in your emails and our phone conversations, you describe a situation where a taxpayer was an individual resident of Canada for a period that is a little over five years, until 2015. In 2015, the taxpayer emigrated from Canada and resumed residency in XXXXXXXXXX (“XXXXXXXXXX”). The taxpayer owned real property situated in XXXXXXXXXX which was acquired prior to the time the taxpayer became resident in Canada.

When the taxpayer ceased to be resident in Canada (upon emigration in 2015), the taxpayer was deemed to have disposed of the real property for proceeds of disposition equal to the fair market value of the property, pursuant to paragraph 128.1(4)(b) of the Act, which was reported on the taxpayer’s return of income for the emigration year. As a result, the taxpayer was subject to Canadian income tax on the capital gain which accrued during the time the taxpayer was resident in Canada.

Furthermore, you advise that the taxpayer continues to own the property post-emigration and will likely do so for a period that extends beyond the statutory assessment periods referred to in subsection 152(4) of the Act. You also advise that upon the actual disposition of the property, which you suggest could occur 20 or 30 years after the emigration year, the taxpayer will be subject to XXXXXXXXXX income tax in respect of the taxpayer’s total gain on the property, accrued from the original acquisition date to the date of the actual disposition, including the period during which the taxpayer was resident in Canada. You advise that relief under a tax treaty is not available to the taxpayer which, in your view, results in double taxation.  It is your understanding that a foreign tax credit under subsection 126(2.21) of the Act is available for an individual’s emigration year, provided the individual is taxed in another country on a gain that accrued while the individual was resident in Canada and was taxed in Canada in the emigration year under paragraph 128.1(4)(b) of the Act. You also recognize that by virtue of paragraph 152(6)(f.1) and subparagraph 152(4)(b)(i) of the Act, such relief is only available for three years following the end of the normal reassessment period in respect of the emigration year.

Accordingly, you ask whether it is possible for the taxpayer to keep the emigration year open by filing Form T2029, Waiver in respect of the normal reassessment period or extended reassessment period, in order to allow the taxpayer to claim a foreign tax credit against the Canadian tax liability for the emigration year as provided under subsection 126(2.21) of the Act, with respect to the foreign taxes paid upon the actual disposition of the real property beyond the statutory period referred to in paragraph 152(4)(b) of the Act.

Finally, you have asked if there is any solution, other than filing a waiver, for avoiding the double taxation and claiming the foreign tax credit provided under subsection 126(2.21) of the Act in a taxation year beyond the statutory period referred to in paragraph 152(4)(b) of the Act.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In addition, we have not confirmed your view that no treaty benefits are available. Accordingly, our comments that follow have not considered any treaty aspects of the described situation.

In general terms, under subsection 128.1(4) of the Act, a taxpayer who ceases to be resident in Canada is deemed to have disposed of the taxpayer’s property (subject to certain exceptions) for proceeds of disposition equal to the fair market value of the property and to have reacquired such property at a cost equal to the deemed proceeds of disposition at the particular time. As a result, the taxpayer will be subject to Canadian income tax with respect to any capital gain that results from the deemed disposition.

Further, under subsection 126(2.21) of the Act, where paragraph 128.1(4)(c) applies to a property of an individual, any resulting Canadian departure tax may be reduced by a foreign tax credit for a portion of any foreign taxes paid on a subsequent disposition of the property. Generally, under subsection 126(2.21) of the Act, an individual may deduct from tax otherwise payable under Part I of the Act for the individual’s emigration year an amount that does not exceed the lesser of the following two amounts:

a) the total of certain foreign taxes paid in respect of the disposition of the property that can reasonably be considered to relate to the portion of the gain or profit in question that accrued while the individual was resident in Canada; and

b) the amount of the individual’s tax under Part I of the Act for the year of emigration that is attributable to the deemed disposition of the particular property under paragraph 128.1(4)(b) of the Act. In determining this amount, any previous applications of subsection 126(2.21) are taken into account.

The credit under subsection 126(2.21) is computed on a property by property basis. A taxpayer would typically file a T1 Adjustment request for the emigration year to claim this credit.

Under subsection 152(4) of the Act, the Minister may not assess or reassess tax payable under Part I for a taxation year after the normal reassessment period (as defined in subsection 152(3.1) of the Act) unless any of the exceptions described in subsection 152(4) of the Act apply. In this regard, pursuant to subparagraph 152(4)(b)(i), paragraph 152(6)(f.1) and subsection 152(4.01) of the Act, the Minister may make an assessment, reassessment or additional assessment before the day that is three years after the end of the normal reassessment period in respect of a taxation year (i.e., the emigration year in this situation) but only to the extent that the assessment, reassessment or additional assessment can reasonably relate, among other things, to a deduction under subsection 126(2.21) of the Act in respect of foreign taxes paid for a subsequent taxation year. In other words, an assessment to take into account a foreign tax credit under subsection 126(2.21) of the Act in respect of foreign taxes paid is permitted only where the assessment is made within 3 years after the normal reassessment period.

Regarding your question on whether it is possible for the taxpayer to keep the emigration year open by filing a waiver for the emigration year, the courts (endnote 1) have described the purpose of a waiver and the circumstances in which a waiver may be given as follows:

A waiver is usually given by a taxpayer to the respondent when there is an unresolved dispute over one or more specific matters and the three year time period within which the respondent may reassess is fast approaching. The execution of a waiver avoids a hasty reassessment by the respondent; it provides the taxpayer with further opportunity to consider adjustments proposed by the respondent and to allow him to make further representations to support his claim.

Although the Act may contemplate the possibility that a waiver permits a reassessment beyond the statutory assessment limits referred to in subsection 152(4) of the Act, the Minister is not obligated to reassess a return simply because a waiver is filed by a taxpayer for a particular taxation year. Any decision to reassess a taxpayer’s return where a waiver is filed is discretionary and dependent on the facts and circumstances of the particular taxpayer. In our view, a blanket waiver request without sufficient details of a transaction would likely not be considered valid. In the situation you describe herein, if any of the circumstances to support the deduction under subsection 126(2.21) of the Act (e.g., disposition of the property and/or foreign taxes paid) are present within the statutory assessment period referred to in paragraph 152(4)(b) of the Act, it may be appropriate for the Minister to consider a taxpayer’s waiver request for the emigration year to allow the Minister sufficient time to review and process any potential reassessment for this deduction beyond the aforementioned reassessment period.

We trust these comments will be of assistance.

Yours truly,

Bob Naufal
Section Manager
Administrative Law Section
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 Donald R. Bailey v. The Minister of National Revenue, 89 DTC 416

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