Tax Credits

AuthorVern Krishna
ProfessionProfessor of Common Law, University of Ottawa Barrister at Law
Pages389-393
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).

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