Principal Issues: What credits and deductions are available to U.S. citizens resident in Canada on taxes paid in respect of dividend income now that rates have increased in conjunction with the "fiscal cliff".
Position: Elimination of double taxation is handled by Art. XXIV,5 Canada-US Treaty.
Reasons: Text of the treaty.
2013 STEP CANADA ROUNDTABLE, June 10 & 11, 2013
QUESTION 4. Foreign Tax Credits for U.S. Citizens
A U.S. citizen who is required to pay U.S. tax by virtue of citizenship cannot claim a foreign tax credit in Canada for U.S. tax paid unless it is paid on foreign source income. This is because of paragraph (d) in the definition of "non-business-income tax" in subsection 126(7).
As you know, in conjunction with the so-called "fiscal cliff," the U.S. tax rate on certain dividends and capital gains has increased from 15% to 20% in 2013; a rate of tax that is now higher than the rate generally provided under international tax treaties. As a result, in respect of an amount of U.S. tax on applicable dividend income received by a US citizen who is resident in Canada, subsection 20(11) could result in the additional 5% being taken as a deduction and not allowed as a tax credit.
Can CRA comment further in this regard?
CRA Response
In recognition of the unique tax position of U.S. citizens that are resident in Canada for purposes of the Canada-U.S. Treaty, paragraph 5 of Article XXIV sets out how double taxation is to be eliminated in the case of dividends, interest, and royalties. Paragraph 5 has existed in its current form since the ratification of the Third Protocol to the Treaty in 1995. Since that time, periods have existed in which the U.S. Internal Revenue Code specified a maximum rate on capital gains and qualified dividends which was higher than the rates applied to such income under the Canada-U.S. Treaty, as well as other international tax treaties.
As such, it is reasonable to expect that paragraph 5 of Article XXIV will continue to apply to taxpayers subject to the rate increases in the United States. In fact, the CRA views paragraph 5 of Article XXIV as a complete code in respect of the deductions and credits available to U.S. citizens resident in Canada for the purposes of eliminating double taxation on dividends, interest, and royalties. The deductions available under paragraph 5 of Article XXIV are available in place of deductions under subsections 20(11) and 20(12), and are typically more advantageous to the taxpayer.
Further guidance on the application and operation of paragraph 5 can be found in our prior document 2002-0143605, and in the Technical Explanation to the Treaty from the Third Protocol. However, if a taxpayer believes they are being taxed in excess of what is provided for under the Treaty, the taxpayer may contact the Competent Authority in their country of residence in accordance with Article XXVI of the Treaty.
2013-048030
Eli Kae Moore