Foreign Tax Credit

It has recently come to our attention that the CRA changed its policy on review of foreign tax credits claimed by individual taxpayers.  The policy was internally revised on June 1, 2015 but has not yet been rolled out to the general public or practitioners.  It is expected that the communication will be available on the CRA website shortly.  Unfortunately this delay in communication caused a lot of headaches to our clients and has doubled up our time and effort in a relatively routine examination process.

The enforcement primarily relates to a tax accrued or paid to a foreign jurisdiction and reported on a foreign jurisdiction’s tax return.  In the past, a copy of the foreign tax return was sufficient to substantiate the validity of the claim.  This is no longer the case; providing just a copy of the return will result in denial of the related claim.  The CRA now requires a copy of a notice of assessment or a transcript from a foreign tax agency.  This includes federal, state and/or municipal notices of assessments or transcripts.

The US as you may know does not typically issue any assessments unless there is a suggested revision to the return.  Thereby an alternative option would be a transcript of a processed return.  I am attaching two links to the IRS web-site that outline timing and the requirements on requesting a transcript by mail which may take several weeks to receive.  If your US tax practitioner is subscribed to the IRS e-Services (typically available only to US citizen tax practitioners; Hanson Cross-border Tax Inc. has a full access to the IRS e-Service), the transcript can be obtained immediately as long as the Power of Attorney has been previously granted to the practitioner and is in the IRS records.  It gets much more complicated at a state or municipal level since each of them is different.  It may require a practitioner’s judgement on whether to pursue the hurdles of obtaining a transcript or to forgo the claim for the state/municipal portion of the tax.

Another revision applies to tax returns which were issued in income-source-country language other than English or French.  Circling around a relevant number and translating only an appropriate sentence or a section of the return is no longer an acceptable option.  Such returns are now required to be provided with certified English or French translation.

These two developments are just another unfortunate addition to the already increased burden and cost of tax compliance to taxpayers.  If our company assists your clients with US tax work and your client is in need of a US tax transcript, please do not hesitate to contact us and we will provide you with a copy of the federal transcript immediately.