Foreign tax credit review

T1
1

We have just received Notices of Reassessment for 2 years wherein CRA reduced the amount of foreign non-business income as reported in box 433 of the T2209 to include foreign income from slips ONLY where those slips also include an amount of foreign tax paid.

The review letter stated: “Only income with foreign taxes withheld is to be included in the calculation of the foreign tax credit. Therefore, the foreign non-business income shown on your investment slip(s) that was not subjected to foreign tax withholdings was excluded from Line 433 of Form T2209, and was not used in the calculation of your foreign tax credit.”

This resulted in the taxpayer owing additional taxes plus interest due to the proportion of foreign non-business income to total income. If this interpretation is correct, then the box 433 amount on the T2209 (and presumably the T2036 as well) which is automatically pulled from the investment slips needs to be reviewed and over-ridden in those situations where there are slips with foreign income and no corresponding tax deduction reported (in box 34 of the T3 or box 16 of the T5).
In other words, the amount of foreign income that is automatically pulled by TaxCycle from the slips to the T2209 may not be correct, if any slips have foreign income with no tax w/h. I assume that as CRA doesn’t receive “consolidated” T3 slips, we will have to break these down into the separate funds and determine whether any of them don’t have tax withheld.
Interestingly, CRA only reviewed the foreign tax credit (not the provincial one).

2

Your client might have some detail which might not be obvious.

I would start by asking the CRA reviewer to provide you with details of exactly which subsection of S126 they are relying on in their review letter assertion that you quoted, as it relates to the sources of income from that country that the client had received.

(Possiblly due to an item/source referred to in S126(9)?)

3

As @joe.justjoe1 suggests, go over what the CRA reviewer has done (which was probably done by the computer without human intervention,) check the sources of the income, then file an objection. You are probably not going to get satisfaction from the clerk who processed the original reassessment or their supervisor. They work purely from rote and instruction from high.

The officer who handles the objection will be highly trained and is used to looking at the law as opposed to instructions.

(Side note: I have had a CRA Post-Assessment Reviewer who told me that they can’t do anything other than what is in the Guide. I had to ignore the Act and draw all the Reviewer’s attention to the various parts in the guide supporting my position. Now, you can’t talk to the person reviewing the material… The only reason I got to talk is because I submitted the documents through the online system, with each page being sequentially marked, and the reviewer noticed that he was missing printed pages!)