CRA Missteps Continue: Foreign Tax Credits

Evelyn Jacks

It is a saga that continues to cost taxpayers a lot of time and money. It's a fight to get CRA to accept documentation from recipients of foreign pensions who have had foreign tax withholdings and legitimately exercise their rights to use their foreign tax credits to avoid double taxation. The problem is, CRA is double taxing for no good reason and in the process, making it extremely difficult for taxpayers to fight back. Here’s an example:

German Pensions Problems: Tax specialist Sigi Merten, MFA wrote in with this real-life situation. He prepared a tax return for a client who received German Military pension income, but CRA would not accept his German Military Income Pension Document as sufficient proof. The result? They denied him the German withheld taxes of 6,150 € ($9,706 CAD) as a Foreign Tax Credit (FTC).

Next, CRA reassessed this client asking him to also pay an additional $8,827 which is 13% of his total income! Remember that this is a quite elderly client with limited funds.

Documentation Requirements Not Clear. So, what is acceptable documentation if an official pension document is not good enough? The CRA is not forthcoming with instructions, and they need to be, and so that fight for the taxpayer’s rights begins.  

Sigi tells us that this is a situation like another which took him 2 1/2 years to resolve. He went to all 4 CRA Tax Offices and finally won for his client, with CRA repaying $36,000 CAD in taxes that were not due to them plus $2,500 in interest! 

Turns out that CRA should not have disallowed the original documentation, or reassessed the taxpayer at all, as there were only two lines in question that required translation to English:  Amount of taxable income paid, and taxes withheld in the foreign jurisdiction which qualify for the FTC here

What the CRA Site Says: CRA is specific about what they want to see. Keep all electronic documents below and if filing a paper return submit:

• Form T2209 Federal Foreign Tax Credit and T2036 Provincial Foreign Tax Credit
• official receipts showing the foreign taxes you paid
• a note explaining your calculations

U.S. Taxes Withheld. If you paid taxes to the United States, also attach:

• your W-2 information slip
• U.S.1040 return
• your U.S. tax account transcript
• any other supporting documents that apply

Other Foreign Countries (language is not English or French). In this case, CRA needs

• a copy of the original documents written in the foreign language
• an acceptable English or French translation

What’s an acceptable translation? Pay very close attention here. The translation must include the signatory’s name (which, by the way cannot be the same as the taxpayer’s name), printed in the Latin alphabet. In addition, one of the following conditions must be met:

• The translation is certified by an official with the authority to administer an oath or solemn declaration (commissioner of oaths, notary public, or lawyer)
  • Exception: the translation can be done by a translator who is a member in good standing of one of the provincial or territorial organizations of translators and interpreters of Canada
• The translation must have the seal and signature of an official from the foreign country's embassy, high commission, or consulate confirming it is a true translation
• The translation must have the signature of a Chartered Professional Accountant confirming it is a true translation
• It must also include a written statement indicating the profession and signature of a teacher, professor, or religious leader confirming it is a true translation

Advocacy Matters. These can be really onerous requirements especially for your elderly clients who are receiving pension income amounts. The stress of receiving a tax bill they shouldn’t have and regular collection calls and interest charges from the CRA can be truly distressing and in some cases affect their health. 

Bottom Line. In the case of Sigi Merten’s client, CRA needed to understand two numbers on a statement similar to a T4A Slip, which must be exactly the same for thousands of pension recipients in Canada.

It appears that the lengths to which CRA is going to disallow perfectly legitimate FTC claims is not only nonsensical but an incredible waste of taxpayer dollars – both for the individual, and also collectively for the larger taxpayer base who pays for CRA labour and interest costs that are ultimately reversed.   

Share Knowledge:  

Are there more cases like this out there? We’d like to hear from you: have you had issues with foreign tax credits being disallowed in error with the result that high interest costs and professional fees are spent for no good reason?

Let us know!

Then mark your calendar to attend the September 23 CE Summit on Audit Defence – a Virtual Workshop you can’t afford to miss. Check out the agenda, speakers, and register online now at learn.knowledgebureau.com/cesummits