Tax Credits

• Author: Vern Krishna
• Profession: Professor of Common Law, University of Ottawa Barrister at Law
• Pages: 389-393

389

CH AP TER 15

TA X CR EDITS

A. gENER A L COMM ENT

Canadian re sidents are subject to full tax l iability on their worldwide

income. Hence, a taxpayer may be subject to double taxation to a for-

eign government for income taxed at source, and to Canada on the

basis of residence. A resident taxpayer may, however, claim a credit

against Canadi an tax for taxes paid to a foreign government.1 The

foreign tax credit, which one calcul ates separately in respect of each

country, relieves juridical double taxation, but does not provide any

relief from economic double taxat ion.2 For example, if company A in

Canada owns 5 percent of company B in the United States, income that

company B earns is t axable in the United States. The foreign ta x credit

merely provides relief from the tax on any dividends that company B

pays to A, and not on the underlying US corporate tax.

The tax credit is avail able only in respect of obligatory taxes paid

to a foreign government. Discretionar y foreign taxes levied by a foreign

government that would not have been imposed if the t axpayer were not

entitled to a Canadia n foreign tax credit are not eligible for credit in

Canada.3 The rationale for this r ule is that the Canadian government

does not want to f‌inance foreign governments by encouragi ng them to

1 Income Tax Act, RSC 1985, c 1 (5th Supp) [ITA], s 126.

2 Ibid, subs 126(6).

3 Ibid, subs 126(4).