Date: 20000720
Docket: T-3058-90
BETWEEN:
GLEN L. TAYLOR
Plaintiff
AND:
HER MAJESTY THE QUEEN
Defendant
REASONS FOR JUDGMENT
ROULEAU, J.
[1] The question to be determined in this matter is whether the defendant calculated the plaintiff"s foreign tax credit in accordance with the provisions of the Income Tax Act1 and the provisions of the Canada-U.S. Tax Convention2 for the 1988 taxation year.
[2] The plaintiff is a citizen of the United States of America who has been a resident of Canada since 1967; during the 1988 taxation year, he was a resident of this country.
[3] At all relevant times, the United States dollar converted to Canadian currency at a rate of $1.2309.
[4] Prior to becoming a resident of Canada, the plaintiff was a member of the United States Navy. In 1988, he received a severance allowance of $7,872.00 U.S. ($9,689.64 Cdn) from which tax was withheld by the Navy in the amount of $1,022.40 U.S.
[5] The Canadian income for the plaintiff"s 1988 taxation year was wages in the approximate amount of $1,560.00 Cdn as well as a taxable dividend from a Canadian corporation in the amount of $8,124.46 Cdn ($5,280,35 U.S.).
[6] In the plaintiff"s 1988 United States income tax return, he had to disclose his world income as a U.S. citizen which included the severance payment from the U.S. Navy, his Canadian wages as well as the dividend. Since he was a U.S. citizen, he was allowed to claim and deduct from his income his mortgage interest in reducing his U.S. liability and tax to $660.64 U.S.; as a result of the withholding tax from the Navy severance pay, he received a refund.
[7] In filing his Canadian income tax return for 1988, the plaintiff claimed a foreign tax credit of $813.19 Cdn ($660.64 U.S.).
[8] In assessing the plaintiff"s income tax return, the Minister disallowed the total credit of $813.19 and reduced it to $486.69.
[9] The Tax Court of Canada rendered a decision dated July 12, 1990 upholding the Minister"s position and the plaintiff"s claim was dismissed.
[10] The issue surrounds the foreign tax credit reduction assessed in accordance with subsection 126(1) of the Income Tax Act which provides as follows:
| 126.(1) A taxpayer who was resident in Canada at any time in a taxation year may deduct from the tax for the year otherwise payable under this Part an amount equal to (a) such part of any non-business-income tax paid by him for the year to the government of a country other than Canada |
126.(1) Un contribuable qui résidait au Canada à une date quelconque d"une année d"imposition peut déduire de l"impôt pour l"année, payable par ailleurs en vertu de la présente Partie, une somme égale à a) la partie de tout impôt sur le revenu ne provenant pas d"entreprises et qu"il a payé pour l"année au gouvernement d"un autre pays que le Canada |
[11] The Act then lists what can be claimed as a foreign tax credit. Paragraph 126(7)(c) then refers to "non-business income tax" paid to a foreign government which may not be included because of the following exception:
| 126(7)(c) but does not include a tax, or the portion of a tax, (iv) that would not have been payable had the taxpayer not been a citizen of that country and that cannot reasonably be regarded as attributable to income from a source outside Canada, or |
126.(7)(c) à l"exclusion d"un impôt ou de la fraction d"un impôt, (iv) qui n"aurait pas été payable si le contribuable n,avait pas été un citoyen de ce pays et qui ne peut raisonnablement être considéré comme étant attribuable à un revenu tiré d"une source située hors du Canada, ou |
[12] The drafting of both these sections of the Income Tax Act is almost unintelligible because of double negatives. What really supports the defendant"s position are certain provisions of the Canada-U.S. Income Tax Convention (1980), more particularly subparagraphs 4(a) and (b) of article XXIV which provide as follows:
| 4. Where a United States citizen is a resident of Canada, the following rules shall apply: |
| (a) Canada shall allow a deduction from the Canadian tax in respect of income tax paid or accrued to the United States in respect of profits, income or gains which arise (within the meaning of paragraph 3) in the United States, except that such deduction need not exceed the amount of the tax that would be paid to the United States if the resident were not a United States citizen; and |
| (b) For the purposes of computing the United States tax, the United States shall allow as a credit against United States tax the income tax paid or accrued to Canada after the deduction referred to in subparagraph (a). The credit so allowed shall not reduce that portion of the United States tax that is deductible from Canadian tax in accordance with subparagraph (a). |
[13] In an attempt to clarify a poorly drafted section of the Act, I interpret subsection 126(7)(c)(iv) to mean the following: that this plaintiff, a U.S. citizen residing in Canada, could not claim the full foreign tax credit earned by virtue of the tax paid to the U.S. because his foreign income tax return had included a dividend earned from a Canadian source. Under this subsection of the Act it would be disallowed since it was income which could not be attributable to a source outside Canada. What is more succinct to explain the Minister"s approach is by referring to paragraph 4(b) of article 24 of the Canada-U.S. Income Tax Convention (1980). The plaintiff should have filed his income tax return in Canada and the taxes payable in this country attributed to the dividend income could then be claimed as a credit in his U.S. income tax return. Under the terms of the Convention, the Minister is obligated to allow a deduction from tax in respect to profits, income or gains which arise or are deemed to arise in the U.S. Since the plaintiff"s dividend income was from Canadian sources, the defendant was not obligated to credit a deduction from Canadian taxes for that tax paid and declared in his U.S. return.
[14] The appeal is dismissed.
JUDGE
OTTAWA, Ontario
July 20, 2000
__________________2 Convention with respect to taxes on income and on capital, signed at Washington on September 26, 1980.