# Foreign Non-Business Income Tax Credit



## Slav (Mar 14, 2017)

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.


----------



## Parkuser (Mar 12, 2014)

Slav said:


> ...
> 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'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.


----------



## Slav (Mar 14, 2017)

Parkuser said:


> 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.


----------



## Parkuser (Mar 12, 2014)

Slav said:


> 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.


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.


----------



## Nerd Investor (Nov 3, 2015)

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.


----------



## Slav (Mar 14, 2017)

Parkuser said:


> 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.


Well, the Turbo Tax may not be wrong because it operates on what CRA puts as formulas for calculations and there is what I am convinced the error is. Can you allow yourself to think that CRA can be wrong? Probably not and maybe that is the reason why this is accepted en masse. How the Almighty Holy CRA could be wrong? Only if one accepts such possibility there is a chance for objective evaluation of the problem. And that is what I am asking here for. CAN WE ALLOW OURSELVES THAT CRA IS WRONG??


----------



## Parkuser (Mar 12, 2014)

Slav said:


> Well, the Turbo Tax may not be wrong because it operates on what CRA puts as formulas for calculations and there is what I am convinced the error is. Can you allow yourself to think that CRA can be wrong? Probably not and maybe that is the reason why this is accepted en masse. How the Almighty Holy CRA could be wrong? Only if one accepts such possibility there is a chance for objective evaluation of the problem. And that is what I am asking here for. CAN WE ALLOW OURSELVES THAT CRA IS WRONG??


In my experience this foreign pension stuff is confusing to CRA agents too. Last year I was audited on this twice. 

In September I’ve got a letter from the CRA office in Surrey, BC, asking me to justify my non-business foreign taxes paid. I paid $40 for an official translation of the foreign pension tax slip and sent it in, together with the TDDI slips, scanned, through MyAccount mail. Two months later I’ve got a letter that my explanations were accepted.

In January 2017 I’ve got another letter, this time from a CRA office in Shawinigan, QC, asking me to mail or fax the paperwork for the split pension amount. This time there was a phone number of the agent, so I called asking to use MyAccount mail. A very polite agent answered the next business day and said no, she has no access to my MyAccount mail. Can she look-up the paperwork I’ve already sent to Surrey? No, she has no access to it. So I said - this is very simple, I calculated the split amount by summing up my Canadian and foreign pensions. She looked it up and replied - I can see it now, it’s OK, you do not have to send anything. I said – it’s great, because your letter had me worried. The reply was – I understand, letters like this always worry me too.

My take is: most of the audits are done by clerks trained to do only routine work, they are not particularly vicious, they have restricted access to my info (which is good), the foreign pension is confusing for everybody, and TurboTax does it right.


----------



## Eclectic12 (Oct 20, 2010)

Slav said:


> Well, the Turbo Tax may not be wrong because it operates on what CRA puts as formulas for calculations and there is what I am convinced the error is. Can you allow yourself to think that CRA can be wrong?


It is entirely possible CRA is wrong ... the challenge is that what the politicians wrote is what CRA is supposed to implement, not what is fair or is generally intended. The same is true for the tax treaties as well as how they change what is done.


I suspect you'd agree that it is fair for the Canada - Britain tax treaty to allow British folks with Canadian sourced income to report the foreign tax paid (i.e. Canadian withholding tax) to offset their British tax. 

Trouble is, when it's an RRIF the Canadian tax withheld is not allowed. The Canadian tax is from a lump sum withdrawal while the British tax is from selling the underlying assets. As the two tax events aren't on the same source - what should be mitigating double taxation is not allowed.
http://www.telegraph.co.uk/finance/...-we-pay-UK-tax-on-our-Canada-pension-pot.html


It is good to follow up but it may be like the pension adjustment reversal (PAR) where until pressure was put on politicians to change the legislation - CRA's hands were tied.


Cheers


----------



## OhGreatGuru (May 24, 2009)

_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.


----------



## Parkuser (Mar 12, 2014)

OhGreatGuru said:


> 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.


----------

