See Also
Black v. The Queen, 2014 DTC 1046 [at 2882], 2014 TCC 12, briefly aff'd 2014 FCA 275
In 2002, the taxpayer was resident both in Canada and the U.K. for domestic tax purposes, but by virtue of Art. 4, para. 2(a) of the Canada-U.K Income Tax Convention (the "Convention") he was a resident of the U.K. for purposes of the Convention.
The taxpayer unsuccessfully argued that his treaty non-residence caused him to not be resident under the Act, so that he was not subject to tax under the Act on non-Canadian source income such as $2.9 million of income from U.S. employment, imputed benefits of $1.4 million from free use of a corporate jet, and interest and dividend income.
If he instead had been successful on this argument, he would have faced a further difficulty in Art. 27, para. 2 of the Convention, which provided that income, which otherwise was "relieved" from Canadian income tax under the Convention but was subject to tax in the U.K. only on a remittance basis, would only be subject to such relief to the extent it was so remitted. Rip CJ found that this provision was not restricted to income which arose in Canada, so that it would have permitted Canada to tax Black's U.S.-source employment income (which had not been remitted to the U.K.), stating (at para. 67):
I agree with respondent that reading the words such as "arising in Canada" into Article 27(2) would distort the intended meaning of that provision of the Convention. I cannot fathom that Canadian and British negotiators would agree to hand over any taxing authority to a third country, in the case of the applicant, income from employment in the United States, to the Americans.
Administrative Policy
19 September 2015 STEP Roundtable, Q.4
Are there circumstances where a request under Art. XIX, para. 5 of the Canada-U.S. Treaty would be denied, and should be returns be filed contemporaneously with the competent authority request assuming the request will be granted?
After noting that, in the absence of an S Corporation agreement under the Treaty, the shareholder may not qualify for full (or any) foreign tax credit relief, CRA indicated that Art. XIX, para. 5 does not apply automatically (i.e., application to the competent authority for the S Corporation agreement is necessary) and that if the shareholder has an interest in more than one S Corporation, a separate agreement is required for each S Corporation. Factors affecting the calculation of the Canadian shareholder's Canadian taxation position include:
- the income of the S Corporation is computed under US tax rules, so that, for example, the full amount of a capital gain would be included in the shareholder's FAPI
- dividends paid to the shareholder by the S Corporation are excluded from the shareholder's income, but only to the extent of the accumulated amount of FAPI that has been included in their income already
- S Corporation losses cannot be deducted from income, including income from other S Corporations, in the year
- losses from an S Corporation can be carried forward and deducted [under Reg. 5903] against the income from the S Corporation if it realizes income in later years
- the income of an S Corporation attributed to a shareholder is not earned income for purposes of the RRSP contribution limit
- the agreement does not relieve the shareholder from the obligation to file a T1134
- the agreement imposes an obligation on the shareholder to retain various worksheets to provide support in the event of an audit
The competent authority may refuse to provide an S Corporation agreement if the shareholder does not submit the information requested by a competent authority or the Canadian shareholder is seeking to revise his Canadian tax reporting for past years.
It is not uncommon for a shareholder to request an S Corporation agreement and, while the request is under consideration, file the Canadian returns in the expectation that an S Corporation agreement will be provided.
21 October 2013 T.I. 2013-0477121E5 - FTC and US Expat Regime
A taxpayer who has renounced his US citizenship elects under Code s. 877A to irrevocably waive any right to claim any reduction in withholding on future pension payments under any US treaty and pay a flat 30% US tax on the taxable portion of all future pension payments. CRA stated:
[T]he interaction between section 126… and the provisions of the Canada-US Treaty will not limit the amount claimed by the taxpayer for non-business-income tax paid to the US in respect of the US-sourced periodic pension payments to 15% during the 10-year period described in Article XXIX(2)(b)… . [F]ollowing the taxpayer's US expatriation and during this subsequent 10-year period, the full amount of US withholding tax on the future taxable distributions from the US pension will be considered non-business-income tax paid by the taxpayer to a government other than Canada for purposes of a foreign tax credit claim pursuant to subsection 126(1)… .
29 July 1994 T.I. 941169 (C.T.O. Deemed Dividend on Redemption Canada-U.K. Treaty")
Re application of paragraph 4 of Article 27 of the Canada-U.K. Convention where a share of a U.K. corporation held by a resident of Canada is purchased for cancellation. RC states that "both the amount of $101 representing the purchase price for cancellation and the U.K. tax credit of $25 would be considered to be proceeds of disposition of the share giving rise to a capital gain treatment. The Canadian resident would be allowed a foreign tax credit for the aggregate U.K. withholding tax of $18.75 levied on the purchase price of the share and the U.K. tax credit."
20 October 1992 T.I. 922116 (September 1993 Access Letter, p. 418, ¶C111-055)
A non-resident of Canada who was resident in England but not domiciled there for tax purposes, and who on her death in England is subject to English estate duty to a deemed disposition under s. 70(5) on shares of a private Canadian corporation and would not be considered to be taxed in the U.K. by reference to an amount that was remitted to or received in the U.K. as a result of such deemed disposition. Accordingly, paragraph 2 of Article 27 of the Canada-U.K. Convention would not apply.
22 July 1991 T.I. (Tax Window, No. 7, p. 22, ¶1364)
Paragraph 2 of Article XXVII of the Canada-U.K. Convention not only restricts the right of taxpayers to claim total exemptions under the Convention, but also restricts the right to claim partial or rate relief.