Art. XXIV(2)(a)(i) of the Canada-US Treaty provides that “income tax paid or accrued to the United States on profits, income or gains arising in the United States” are deductible from Canadian taxes on those items. Art. XXIV(2)(a)(ii) provides that individuals can also claim most social security taxes paid, without the word “accrued”. Article 21(1)(a) of the Canada - UK Treaty refers to tax payable in the UK. Where taxes are accrued but not paid in this context, may a foreign tax credit be claimed for taxes payable, even if they have not yet been paid?
CRA indicated that Art. 21 of the Canada-UK Treaty addresses the elimination of double-taxation. Para. 1(a) thereof expressly provides that the relief is “[s]ubject to the existing provisions of the law of Canada regarding the deduction from tax payable in Canada of tax paid in a territory outside Canada and to any subsequent modification of those provisions”.
Many Canadian treaties have a similar clause and, 2015-0601781E5 commented on this “subject to Canadian law” clause in Art. XXIV of the Canada-US Treaty – and took the view that this meant that a Canadian resident was subject to the “paid” requirement of s. 126.
CRA views the same interpretation as applicable to Art. 21(1)(a) of the Canada-UK Treaty. Therefore, the amount of the foreign tax needs to be paid in order to be eligible for the foreign tax credit.