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Foreign Non-Business Income Tax Credit

5K views 9 replies 5 participants last post by  Parkuser 
#1 ·
I think I encountered a serious error in the formula for calculations of the Foreign Non Business Tax Credit (FNBTC), which in most cases means tax on foreign pensions. The formula provided in the T2209 form calls for entering the Basic Federal Tax which is calculated after subtracting Non-Refundable Tax Credits. This formula produces absurd results. To simplify it a bit, let's consider only total foreign and Canadian income that is below the 15% tax threshold level.

First, regardless of the foreign income and the total income that includes the Canadian part, the formula generates double taxation as it always generates some extra tax. But going even further, with the constant foreign income, the higher is the Canadian portion of the income, the highe is the FNBTC and the lower is the tax demanded by CRA as a result of reporting a foreign pension. The vice versa, the lower is the Canadian portion, the higher is the tax demanded by CRA. Such results are absurd and they contravene the essence of any Convention between Canada and other countries which purpose is exattly to be avoiding double taxation.

The reason for these erroneous results is, as I figured out, that instead of the Basic Federal Tax (Line 429) there should be used tax from the line 404 which is total tax BEFORE applying the Non-Refundable Tax Credits. If that formula is used, all results make sense and are in line with international tax Conventions.

I am not a tax accountant but this problem applies to my situation and that is how I got involved. Yet, it is hard to imagine that such an important glitch can be in the system. If it is, it then affects thousands vulnerable first generation immigrants who most likely live on a low budget, have limited command of the English language and Canadian Tax Laws, and who generally are unwilling or afraid to challenge tax authorities.

Please, let me know if you think that my understanding of the challenge is right or I make somewhere a serious error.
 
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#2 · (Edited)
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The reason for these erroneous results is, as I figured out, that instead of the Basic Federal Tax (Line 429) there should be used tax from the line 404 which is total tax BEFORE applying the Non-Refundable Tax Credits. If that formula is used, all results make sense and are in line with international tax Conventions.
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I've looked how my 2015 taxes were calculated by TurboTax. I had two T2009’s, US dividends and a foreign pension. The foreign pension was already taxed at slightly less than 15%. US dividends were taxed at 15%. The tax credit was calculated as the lower of a)tax already paid i.e. line 431 and b) Foreign pension*[(line404 – line350)/line 260]. [(Line404-line350)/line260] was slightly higher than 15% thus on both T2009’s line 3 was equal to line 1 (i.e. line 431) that is to the taxes already paid.

I hope it helps.
 
#3 ·
I've looked how mine 2015 taxes were calculated by TurboTax. I had two T2009’s, US dividends and a foreign pension. The foreign pension was already taxed at slightly less than 15%. US dividends were taxed at 15%. The tax credit was calculated as the lower of a)tax already paid i.e. line 431 and b) Foreign pension*[(line404 – line350)/line 260]. [(Line404-line350)/line260] was slightly higher than 15% thus on both T2009’s line 3 was equal to line 1 (i.e. line 431) that is to the taxes already paid.

I hope it helps.
I am not sure if it helps me. Let's bring it down only to the foreign pension. Line 404 - 350 = Line 429 Basic Federal Tax. Line 260 is Taxable Income. I don't understand how that calculation could give you 15%. If these were basically the same in terms of dollars, you got a full credit for the the foreign tax already paid.

However, their formula for FNBTC is: (Line 433/Line 236) x Line 429. That seems to be always lower than Line 431 which means the credit is always lower than the tax already paid, causing additional tax.
 
#4 ·
I am sorry, just wanted to show how the TurboTax calculates. Line 433 is the foreign pension before taxes times the exchange rate, which is the same as you calculate. In my case line236>line260 because I had around 4% capital losses (line 253, lucky me :)). And again, Line429>>(line404-line350) (by about 37%) because I had a dividend tax credit, line425.

It is still confusing, and maybe does not help, but I would assume that TurboTax is not wrong.
 
#5 ·
There isn't an error, the closest thing you'll experience to double taxation is if your Canadian tax before the foreign tax credit is so low that you can't use it all. In this case, you still wouldn't pay more than the tax paid to the foreign country under the treaty (usually 15%).

For example, if I get pension income from the US and they withhold 15% but my average tax rate on my total income in Canada is only 10%, I am leaving 5% on the table but I still haven't paid more than 15% total tax. Just a thought, are you using Form T2036 to claim your provincial foreign tax credit as well? If it seems like you're missing out, this may be the reason.
 
#9 ·
First, regardless of the foreign income and the total income that includes the Canadian part, the formula generates double taxation as it always generates some extra tax. But going even further, with the constant foreign income, the higher is the Canadian portion of the income, the highe is the FNBTC and the lower is the tax demanded by CRA as a result of reporting a foreign pension. The vice versa, the lower is the Canadian portion, the higher is the tax demanded by CRA. Such results are absurd and they contravene the essence of any Convention between Canada and other countries which purpose is exattly to be avoiding double taxation.

You are doing something wrong, because the the formula as spelled out in T2209 has the opposite effect. Read the introductory page as well. Remember, it is calculating a credit, not a tax.
 
#10 ·
You are doing something wrong, because the the formula as spelled out in T2209 has the opposite effect. Read the introductory page as well. Remember, it is calculating a credit, not a tax.
I may be wrong, but I think this is the (simplified) gist of the OP complaint.

Let say your foreign pension is taxed at source at 15%, your net is 85%. If your Canadian income is taxed at 20% you get a credit for the whole 15% tax withdrawn at source and additionally your net foreign pension will be taxed at 5%. But if your Canadian tax rate is 0% (no Canadian tax to be paid) then you get no credit for the tax withdrawn at source. The OP would like Revenue Canada to give him back 15% withdrawn by the foreign government.

I think it is like US dividend tax in TFSA. US dividends are not taxed by the IRS when in RRSP but taxed at 15% in TFSA. One cannot get credit for this tax.
 
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