Claiming Foreign Income and an offsetting deduction on Line 25600

I have an East Indian client who immigrated to Canada in 2016. Another accountant filed his returns for 2016 & 2017. When he came to me in 2019 to file his 2018 tax return, he included the CRA reassessment of his 2017 tax return with the 2018 tax papers he brought me. This client owns a proprietorship business in India and continues to run it from Canada. The business is solely in India with no branches in Canada. In 2017, he had no other employment. His 2017 tax return included this foreign self-employment business income plus some foreign investment income (all earned in India). The accountant who filed this return grouped everything onto Line 130 (other income) and then claimed an offsetting credit on Line 256 (exempt foreign income). CRA review was to verify the Line 256 exemption. They approved it, approving the entire amount, both business income + investment income. The only change that was made was to correct how the amounts were prorated (India’s calendar year is April 1st to March 31).

Moving forward to 2020’s taxes, I have another very similar client who immigrated from India in 2019 and also has sole proprietorship businesses in India with no branches in Canada. He had a net loss in 2020 on his India business income, also has foreign interest income (all earned in India), and also has some capital gains from cashing out mutual funds in his India brokerage account. I spoke to a CRA agent in the CRA Center of Expertise today to clarify my understanding of the India tax treaty with Canada to determine if we could claim any or all of this income as exempt on Line 25600. On the surface, she agreed that the business income should qualify as exempt, even if he had a profit, and suggested that the investment and capital gain income could be taxed in both locations (same interpretation I had), but also recognized that it too could be considered exempt. Because of the uncertainties, she agreed with my suggestion on including it all as a deduction on Line 25600, and then when CRA’s review letter comes asking for details about Line 25600, we attach a letter explaining our understanding of the tax treaty as it relates to this income and let CRA make the decision on how to apply it.

I would let my client know to expect a review letter from CRA and that he may end up owing taxes to CRA on the capital gain and perhaps the investment income. In this scenario with putting everything on Line 25600, we wouldn’t claim any foreign tax credits since he still needs to pay his share of taxes (in this case, his taxes will all be applied in India, so it wouldn’t be right to give him any reductions in tax).

Any thoughts on this before I proceed? In the past, I haven’t used Line 25600. I have always used the Foreign and the FTC tabs, claiming the foreign tax credits. It’s interesting too that on the Foreign tab, only the Investment and pension income allows for an Exemption on Line 25600, implying that I would have to manually add these to Line 25600 to claim those exemptions. Perhaps that’s why the previous accountant simply grouped everything onto Line 130 and then manually added it to Line 256, bypassing the Foreign and FTC tabs.

In light of the CRA review from 2017 on that other tax client approving the deductions on Line 25600, I thought it worth investigating this option in more detail especially because it dramatically reduces the amount owing on this years taxes.

Thank you in advance for your insights.

Is this a real department? Can I get the phone number?

No direct phone number. Sorry. We still have to phone the General Inquiries line, wait in the queue for them to take our call, then ask to be transferred to the “Center of Expertise”, then wait in that queue for them to take our call.

Basically, when the first agent we connect with doesn’t have the skill set to reply, they transfer our calls to someone with more knowledge specifically on that topic. As tax practitioners, we often know in advance that the first agent will need to transfer us. Thus, to save time, we can simply request this transfer, identifying briefly our issue so that the agent has an idea of who to transfer the call to.

I think it was last year or the year before that one of the agents gave me this tidbit of information, as this helps to streamline the call. Sadly, the agents aren’t allowed to phone you back in event the phone call gets terminated while they do their research. My call got terminated on the 16th after 4 hrs of waiting in the queue to talk to the 3rd agent I was transferred to. Yesterday morning, after a 2 hr wait to connect to the 2nd agent, I was put on hold while they did their research, and after 1/2 hr on hold, the call dropped. On my third attempt, starting again from scratch with the General Inquiries line, I asked the 2nd agent if she could call me back if the call got terminated, and she said that her department wasn’t allowed to do that. Luckily we weren’t terminated!