2016-0673171E5 Foreign tax credit - former resident

Principal Issues: Whether the Minister can reassess an individual's return for an emigration year to allow a claim for a foreign tax credit under subsection 126(2.21) where the actual disposition and related foreign taxes occur beyond the extended reassessment period referred to in paragraph 152(4)(b) in respect of the emigration year?

Position: 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 assessment period referred to in paragraph 152(4)(b). In addition, subsection 152(4.2) does not provide for an extension of the aforementioned statutory reassessment period for a taxpayer’s emigration year with respect to the deduction under subsection 126(2.21). However, 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 assessment 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 legislation.

Author: Godson, Gillian
Section: 152(3.1), 152(4)(b)(i), 152(4.2), 152(6), 126(2.21)

XXXXXXXXXX                                                                     2016-067317
                                                                                             G. Godson
October 11, 2017

Dear XXXXXXXXXX:

Re: Foreign tax credit – former resident

This letter is in response to your letter dated October 26, 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 (the “Act”). We apologize for the delay in responding.

Your letter refers to a hypothetical situation involving the emigration of an individual from Canada to the Republic of Korea (“Korea”). The individual became a resident of Canada in 2005 and owned real property situated in Korea purchased a time prior to becoming a resident of Canada for $600,000. The fair market value of the property was $1,000,000 at the time the individual became a resident of Canada. The individual ceased to be a resident of Canada in 2015. At the time of emigration, the fair market value of the property was $1,500,000. In your letter, you acknowledge that the individual will be subject to Canadian income tax for the period immediately before emigration (i.e., the “emigration year”) with respect to the accrued capital gain on the real property during the period the individual was resident in Canada. In your hypothetical situation, you indicate that the individual is expecting to dispose of the property and will be subject to Korean income tax based on the accrued gain on the property from the time that the individual acquired the property to the actual disposition. You also advise that the Korean income tax system does not permit tax relief with respect to Canadian income taxes paid on the individual’s emigration from Canada.

In your letter, you indicate that the Act allows a taxpayer to change a return for a tax year ending in one of the 10 previous years. Accordingly, you have asked whether the individual would be permitted to claim a foreign tax credit on the individual’s Canadian income tax return for the emigration year with respect to the Korean income taxes paid on the eventual disposition of the real property, which could occur within 5 to 10 years from the emigration year or a time beyond 10 years from the emigration year.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation. 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, our comments that follow are based on the understanding that any tax relief under a tax treaty is not available to the taxpayer.

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 proceeds of disposition. As a result, the taxpayer will be subject to Canadian income tax with respect to any capital gain that results from the deemed disposition.

However, any resulting Canadian departure tax may be reduced by a foreign tax credit, under subsection 126(2.21) of the Act, 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 for the individual’s emigration year an amount that may 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 arose 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 128.1(4)(b) of the Act. In determining this amount, 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 of a taxpayer under Part I for a taxation year after the normal reassessment period (defined in subsection 152(3.1) of the Act to be the three-year or four-year period, as the case may be, from the date of the taxpayer’s original Notice of Assessment) 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 an amount that is claimed as 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.

Subsection 152(4.2) of the Act gives the Minister the discretionary authority to make a reassessment at any time after the end of the normal reassessment period in respect of a taxation year, when so requested by an individual, to determine the amount of any refund or a reduction of an amount payable under Part I for that taxation year. The individual must make the request on or before the day that is 10 calendar years after the end of the taxation year. Generally, an individual can make a written request in respect of a taxation year, within this 10-year time limit, if the individual was not aware of, or missed claiming a deduction or a credit that was available for that year. A reassessment to reduce taxes payable for a taxation year will generally be made upon receipt of a written request made after the normal reassessment period where the Minister is satisfied that the request for the adjustment would have been processed if it had been made within the normal reassessment period. In our view, subsection 152(4.2) of the Act does not provide for an extension of the statutory assessment period referred to in paragraph 152(4)(b) of the Act for a taxpayer’s emigration year with respect to the deduction under subsection 126(2.21) of the Act.

Please note that in document 2016-066042, we commented that the Act contemplates the possibility of a taxpayer filing a waiver request for the emigration year within the statutory assessment periods referred to in subsection 152(4) of the Act that permits a reassessment beyond these periods. The Minister is not obligated to reassess a return simply because a waiver is filed by a taxpayer for a particular taxation year and 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.

However, in that document we also opined that 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

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