Principal Issues: Canadian tax treatment of tax credits and advance payments provided to a Canadian resident individual under the U.S. 2008 Economic Stimulus Package
Position: Not included in income but may reduce an individual's foreign tax credit
Reasons: See memo
February 17, 2009
Joanne Marchesano Senior Individual Services Agent HEADQUARTERS Taxpayer Services Division A. Seidel, CMA 120 King W, 8th Floor, P.O. Box 2220 (613) 957-2058 Hamilton ON L8N 3E1
2009-030642
U.S. 2008 Economic Stimulus Package
This is in reply to your correspondence of January 16, 2009 in which you requested our views concerning the Canadian income tax consequences to a Canadian resident individual who receives a benefit under the U.S. Economic Stimulus Act of 2008.
Background
The United States passed an economic stimulus package in February of 2008. The legislation implementing the package (Economic Stimulus Act of 2008) amended the U.S. Internal Revenue Code to provide for a refundable credit against income taxes ("Tax Credit") for 2008. The Tax Credit is available to certain low to middle-income individuals ("Eligible Individuals") including Eligible Individuals resident in Canada.
Most Eligible Individuals received an advance payment ("Advance Payment") of the Tax Credit. The amount of the Advance Payment was based on 2007 tax returns and information provided by the Social Security Administration or Veterans Administration. An individual who did not receive an Advance Payment but was an Eligible Individual for 2008 is entitled to the Tax Credit when computing his/her income taxes payable for 2008. In addition, where an Eligible Individual received less than the maximum amount of the Tax Credit as an Advance Payment, the individual is entitled to claim the difference in computing his/her 2008 U.S. income tax liability. However, if the individual is not an Eligible Individual in 2008, or the available Tax Credit is less than the Advance Payment received, the individual is not required to repay any portion of the Advance Payment. While the Advance Payment is based on information relating o the 2007 taxation year, it is not a credit or refund of 2007 taxes payable but an advance payment of the Tax Credit.
Our Comments
In our view, the amount of any Advance Payment received, or Tax Credit claimed, by a Canadian resident individual, would not be required to be included in the individual's income under the Income Tax Act ("Act"). In this respect, we would not consider a reduction of U.S. income taxes in the circumstances described (either in the form of a Tax Credit or an Advance Payment) to be income for Canadian income tax purposes. In addition, to the extent that any portion of the Tax Credit or the Advance Payment exceeds the individual's 2008 U.S. income tax liability that portion would, in our view, be a non-taxable windfall [See, in this respect, our discussion of "windfalls" at paragraph 3 of Interpretation Bulletin, IT-334R2 "Miscellaneous Receipts" dated February 21, 1992].
Pursuant to section 126 of the Act, a Canadian resident taxpayer is entitled to claim a foreign tax credit for a taxation year in respect of certain taxes paid to a government of a foreign country. To the extent that the Tax Credit reduces a Canadian resident individual's 2008 U.S. income taxes payable, it will reduce the amount of U.S. income taxes that are eligible for the foreign tax credit. Similarly, where an Eligible Individual receives an Advance Payment that represents a rebate of U.S. income taxes payable for 2008, the amount of the Advance Payment should be deducted in computing the individual's U.S. income taxes payable that are eligible for the foreign tax credit.
We trust that our comments are of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch