Tax Credits

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

389

CHAPTER 15

TAX CREDITS

A. gENERAL COMMENT

Canadian residents are subject to full tax liability 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 Canadian tax for taxes paid to a foreign government.1 The

foreign tax credit, which one calculates separately in respect of each

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

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

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

company B earns is taxable in the United States. The foreign tax 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 available only in respect of obligatory taxes paid

to a foreign government. Discretionary foreign taxes levied by a foreign

government that would not have been imposed if the taxpayer were not

entitled to a Canadian foreign tax credit are not eligible for credit in

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

does not want to f‌inance foreign governments by encouraging 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).