For those with an interest in the intricacies, here is the email explanation I received from Benjamin Gao of TaxChopper after I gave him permission and he looked at my account entries:
"I checked your account. Line 232 is the unused foreign taxes. You paid 596.80 in total to the U.S., however, you can only claim 209.74 federal foreign tax credits and 96.91 provincial foreign tax credits, so the unclaimed part (596.80 - 209.74 - 96.61 = 290.25) is deducted at line 232 of your return.
The deduction is allowed under Canadian tax law. I am not a lawyer, however, our consultant is a chartered accountant, he okayed this a few years ago. We also have some clients deducted this amount before and got questioned from CRA (because in NETFILE, there is no place to put descriptions, CRA don't know where line 232 came from), and after explanation, none of them got bothered any more.
You can check the tax guide at CRA's form T2209, at the second page, second last paragraph, which readsAlso, on line 232 of your return, you may be able to deduct the amount of net foreign taxes you paid for which you have not received a federal, provincial, or territorial foreign tax credit. This does not include certain taxes you paid, such as those on amounts you could have deducted under a tax treaty on line 256 of your return.
You can get the T2209 at
I have to admit the calculation is not that easy. For example, according to other calculations, you would have claimed 338.67 total foreign tax credits. But once you apply the unused amount, both net income and foreign income (used to calculate the credits) will also change, and you will find you can only claim a less amount so you will have more unused taxes to deduct. If you do it manually, you can go several rounds to make them balanced or almost balanced.
To comply with CRA's test data (which are not optimized), we have a page to disable this feature, you can find it at our softwareGeneral Credit => Foreign Non-business Tax CreditYou tick-check the very last box at that page and save, then you will find we have the same refund as others, but it is $35 less.
I have no idea why all other companies are not claiming this deduction automatically, there is an obvious difference between the foreign taxes paid and foreign credit claimed. and the tax guides are there in black and white."
Lessons:
- Canadian tax rules are crazily complicated - we'll have to replace the expression "he's no rocket scientist" with "he's no tax accountant" as the measure of intelligence
- it appears that the various tax packages are more or less competent at finding and applying rules that can minimize taxes
- NETFILE certification testing does not test all legitimate tax minimization action and optimizations - note how Benjamin says that the CRA test data does not cover this particular optimization! ... if CRA were to develop its own free plain-jane online service, which by definition would only present the forms in a passive state without active optimization routines (and thus this is not an accusation of nasty motives against CRA), many people would grab it not realizing that they could actually save on taxes with private software such as TaxChopper's, so I'm gonna backtrack and say, CRA, please DO NOT develop a free online tax package! People would unwittingly pay more in taxes than they would save from the software being free.
- CRA could and should add further explanation to its NETFILE Sotware page in the yellow box, something to the effect, "Certification testing does not cover all the ways that the software packages may claim deductions, effect transfers of credits and deductions or perform optimizations that may result in legitimate differences in the net amount of taxes owing by, or refund payable to, a taxpayer. The packages may produce different results and yet still be acceptable to NETFILE."
- I only tested using one set of data and circumstances, so the lowest tax for any individual may come out of another package ... therefore, shop around and take the trouble to enter your data into a couple of different packages to see which gives the best result - they all will give you a bottom line refund due or amount owing before you pay. I note that TaxChopper offers a Maximum Refund Guarantee or your service fee refunded if any package beats them. I especially like guarantees that are never used, like warranties on cars that never break down.
No news yet from CRA, which is looking into the wide variability of my testing results. My ratings will need to be revised when the most accurate / lowest legitimate tax-payable package is revealed. Suffice it to say for now that TaxChopper has a leg up on everyone else.
Stumble It!
14 comments:
The calculation of the foreign tax credit and deduction is not an easy calculation and many tax software packages do not accurately calculate it.
Without going into excessively painful detail but if you want to do it correctly, and have several hours to create a spreadsheet, you can correctly do it. But you will quickly find that it (correctly) creates a circular reference: That means the answer is part of the equation that comes up with the answer...what?
The short of it is that Mr. Gao is absolutely right!
YES very complicated and I don't claim to be an expert.
but, I don't think it is absolutely right!
The T2209 stipulates clearly that if there is a TAX TREATY between the 2 countries, for example Canada and US, that the excess is not eligible for the 20(11)and 20(12) deductions, because it does not qualify as foreign taxes paid.
the 20(11) and 20(12) are deductions for excess foreign taxes, if the excess is from a country to which a TAX TREATY exists it is deemed not to be Foreign taxes and is a voluntary contribution.
http://www.cra-arc.gc.ca/E/pbg/tf/t2209/t2209-08e.pdf includes the following note:
"Note: Any amount of tax you paid to a foreign government in excess of the amount you had to pay according to a tax treaty is considered a
voluntary contribution and does not qualify as foreign taxes paid."
Does "Tax Chopper" ask you for the country of origin of the foreign income?
Other softwares act accordingly when the country of origin is defined. US = tax treaty therefore no 20(11) (20(12) (line 232).
If Country is "Afghanistan" than the 20(11) deduction is allowed.
and per the IT bulletin 506 (section 3 (c))
http://www.cra-arc.gc.ca/E/pub/tp/it506/it506-e.html.
"3(c) deduct under subsection 20(11) the portion, if any, of the foreign tax that exceeds 15% of the gross income for the year from the particular property; and"
the 20(11) deduction of taxes paid greater than the foreign credits is only applicable for the amounts greater than 15% of the gross income, not simply the unused foreign taxes paid not claimed as CREDIT. Foreign income * 15% is the threshold used for the 20(11) deduction, not the unused taxes paid after the foreign the credits.
then the excess (not including amounts from TAX TREATY nations) can be claimed as a 20(12)......
then paragraph 126 etc....
This is Benjamin from CuteTax Inc. Just to clarify some misunderstandings of my email to Mr. Lesperance regarding the certification and the CRA.
We have been working with CRA for several years, the people there are smart and intelligent, they have identified many improvements for all the software, including ours. They work as hard as any of us. They are not crazy people who just want to grab money from taxpayers. Their job is to ensure all taxes are collected so the government can afford to deliver all kinds of services to Canadians.
For people who are responsible for software certifications in CRA, they have no obligation, and get no extra support or resources to do optimizations, simply put, it is not their job. However, the test cases they make do have optimizations in them, but as Jean pointed out, the optimization is like rocket science, it is not possible for anyone to do them all.
We have several optimizations which all others don’t have, it is our intention not to reveal them to CRA. If we did and ask CRA to change its test data, then everyone else will learn our business secrets. As a private company we need to have something to compete with other competitors. And I think all other companies would do the same.
I know for sure CRA has never discouraged optimizations of anybody, it is individual company’s obligation to do optimizations as hard as possible. For the unused foreign taxes deductions, it is not something CRA tries to hide somewhere so you have to work hard to dig it out. It is printed at the general tax guide before 2007, anyone can get a copy of it at a CanadaPost outlet. After 2006, it is print clearly in form T2209, any software which claim foreign tax credit should use this form and I an wondering why this part is not read by anyone. Not believe? Here is a link to 2006 tax guide, look at page 47 by yourself.
There is another not-so-easy-but-also-not-so-hard point that most products are not doing or not doing so well is the pension splitting. For most (at least 50%) pensioners, there is only one split amount that can get a couple the maximum refund, so you suppose a good tax software should predict that point. I don’t want to comment any of my competitors, they might work ass hard as we are, but if you are eligible for have pension splitting, test our software(free to test) and the one you used, you are going to get a surprise.
People sometimes rely too much on big names. For example, while politicians shamelessly claim our banks are the best in the world, many people believe. But are they really? Big Canadian banks charge far more fees in everything we do (sometimes to consumes, mostly for merchants) than small banks and American banks, when troubled American banks follow the government’s rate cut every time, our banks don’t. Our saving interests is lower, but loan interests are higher, so the big banks make good money from Canadians and when they face overseas, like buy US sub-prime mortgages, they crash. What are the overall losses Americans suffer in total for this crisis? NEGATIVE. The overall balance for American is gains not losses. The math is simple, home owners get a mortgage from bank, usually extra cash, they spend it, and then give up the mortgage, so they win. Banks then sell the debt overseas to the whole world, including Canada, when the debt can’t be paid, they go bankrupt and they did not suffer as much. It is the banks who hold their commercial paper in other countries bear the ultimate losses.
This year the competition in tax software is very fierce, but seems people are more likely to go big names. Just like we don’t trust small banks, letting big guys take everything will be the ultimate loss for everyone. Before 2001, average family had to spend $70 or more to buy a tax software and now it is much cheaper with richer features, we should not let it go back.
A big difference between tax software and bank services is: most software offer free trial! It costs you nothing other than a few more minutes to find who gives you more at bottom line, and that can save you real bucks.
Benjamin
The second comment posted by Anonymous is erroneous. The foreign tax credit can only claimed if we HAVE a tax treaty with that country.
Second, when entering a regular T5 slip as Jean does, where is the other softwares asking countries of origins?
Third, have you read the second page of form T2209 I mentioned?
YES - I've read it Benjamin and
IT - 506 and IT- 270 (interpretation bulletin)
So you agree that there is a tax treaty between Canada and the US.
If so.....read IT-270
IT 270 states the following:
"If, for example, a resident of Canada receives income from sources in another country which has been subject to withholding tax at a rate in excess of that specified in a treaty between Canada and that country, such excess is not considered to be foreign tax “paid for the year” for purposes of the foreign tax credit. The maximum credit allowed will be determined on the basis of the treaty rate and the taxpayer must seek a refund of the excess withholding tax from the foreign revenue authorities."
If you must seek a refund of the excess from the foreign authorities (above the 15% treaty rate), why would CRA allow you to claim it as a deduction as well.
and if it is not considered to be "foreign tax paid" how can you claim a 20(11) or 20(12) as they are deductions for foreign tax paid... are they not?
We have a TAX TREATY with the US, in which we must pay 15%.
T2209 page 2
Note 1: Any amount of tax you paid to a foreign government in excess of the
amount you had to pay according to a tax treaty is considered a voluntary
contribution and does not qualify as foreign taxes paid.
regarding: IT-506
what do you say about the 15% threshold included in IT-506 regarding the 20(11) deduction.
The 1st threshold is the 15% of the foreign income (4000*15% (600$) and only than can you claim any excess foreign taxes paid over the credits claimed not exceeding the 15% rule.
"3(c) deduct under subsection 20(11) the portion, if any, of the foreign tax that exceeds 15% of the gross income for the year from the particular property; and"
I looked on Ufile.ca (surely quicktax as well) they ask you for the country or origin.
T5 dividends under the boxes 15 and 16. they request you to select the Country name (or source) if you have foreign income.
They (ufile/quicktax) also do the Pension optimization you speak of, I used UFile.ca last year because at the time it was the ONLY product doing the pension splitting.
Did Tax chopper do the splitting last year?
To Anonymous
It is too difficult not to believe you are from the software company you mentioned several times. This would be my last response to you (unless you idenitfy yourself and take a highroad), first let me answer your last question, we did have pension splitting last year and whether it is better or not we should let our clients to find it out.
As we both claimed, both you and I are not tax lawyers, so I will not try to quote anything from Income Tax Act, only a judge is in the position to interpret it. What we are doing is we follow CRA’s tax guide printed on page 2 of T2209, which reads: Also, on line 232 of your return, you may be able to deduct the amount of net foreign taxes you paid for which you have not received a federal, provincial, or territorial foreign tax credit. We have been doing this for several years, and CRA has audited several of our clients for this deduction and our clients all passed CRA’s scrutiny.
As online tax preparation service provider, Canadian put tremendous trust on us. They have every reason to expect us to take the highest standard and integrity about our conduct, regardless the position in the market place, or how other people view us. The integrity should includes fair play, no mudslinging, etc. Disguise ourselves as anonymous or as a random user to make comments without taking responsibilities is the last thing Canadians want us to do. We all know no product are perfect, and we respect all players in the field, no matter they are bigger or smaller, their product is better or not better than us, they all provide Canadians with more choices. Our concentration only focuses on improving our service, not anything else.
I believe only the clients can judge and compare our products, Jean is just one of them. We should encourage and help them to do that.
Um, in case it helps sort out this discussion, the foreign tax paid was 15% as per the normal tax treaty witholding by the USA. The line 232 was deducting the remainder of the 15% foreign tax that couldn't be applied as a straight foreign tax credit.
I'm just a DIY tax preparer trying to understand this stuff.
The paragraph that was referred to on the T2209 is not complete. It and the reference on the taxtips.ca website state that you "may" be entitled and that you should refer to the IT-506 for more details regarding the 20(11) and 20(12)deductions. IT bulletin 506 clarifies under which cases your are and are not entitled to the deductions. The deductions appear to have exclusions and limitations.
I'm trying to understand what they are...
It doesn't appear to be black and white to me.
I'm curious like everyone else, so started following the CRA form and IT trail. T2209, where it says in relation to line 232 that one MAY be able to deduct the unused tax credit from income, says to get details from IT-506. In there it distinguishes, if I get this right, two types of unused foreign tax, one under 20(11) - the over 15% - and the other under section 20(12), the under 15%.The paragraph 5 of IT-506 says "In computing income for a taxation year a taxpayer (not limited to an individual as in 3 above) may claim a deduction under subsection 20(12) in respect of modified non-business-income tax paid for the year to a foreign government". That looks to me the place CRA says the line 232 deduction is allowed for my case. i.e. if you don't get a straight tax credit, you are allowed to deduct the rest from income, or I guess, you could theoretically deduct it all from income but that isn't as valuable as the tax credit so it ends up being best to claim only the remainder. Is that right Benjamin and CTR? What do you think too, Anon?
reading these IT bulletins just makes my eyes glaze over. what i don't understand is the fact that in order to calculate the 20(11) or 20(12) correctly you need to know if there is a tax treaty between canada and the source of the foreign income. ufile and quicktax both ask for the country but taxchopper does not. so there is no way taxchopper could even begin to classify it as 20(11) or 20(12) without that piece of info.
brad
To brad
Seems like you love UFile / Qucktax so much only because they are not giving you this deductions. Yes, they have all been asking questions, but after that -
Thay have done nothing and you still love them??!!
We have got the a confirmation from another very experienced CGA, the conclusions are as following:
1) The tax treaty question should not be involved in this discussion because we are talking everything under the topic of foreign tax credit. If there is no tax treaty, then you can’t claim foreign tax credit. If you got your T5 slip with box 15/16, then the bank should have confirmed that foreign tax credit is allowed under tax treaties;
2) Income Tax Act 20(12) allow tax payer to deduct part or all of the foreign taxes paid under this category. So the best thing to do is find the optimal deduction so dollar-for-dollar foreign tax credits can be claimed as much as possible and use the rest to reduce your taxable income. That is what Tax Chopper has done and all others have missed.
Benjamin
A gold star goes to TaxChopper on the line 232 issue. The CRA folks finally phoned me back and themselves confirmed that such application of the foreign tax credit is permissible.
I think some products ask for the country of origin because the rules state you must file and calculate a different T2209 for each country, unless the total taxes paid is less than 200$.
T2209
"If the total of the foreign taxes you paid
to all foreign countries is more than $200, do a calculation on a separate sheet for each foreign country to which you paid taxes, and add the totals to
Form T2209."
and treaties come into play under IT-270 when there is an excess of taxes paid when a treaty is in place, if pay taxes to US > 15%.
IT-270
"If, for example, a resident of Canada receives income from sources in another country which has been subject to withholding tax at a rate in excess of that specified in a treaty between Canada and that country, such excess is not considered to be foreign tax “paid for the year” for purposes of the foreign tax credit. The maximum credit allowed will be determined on the basis of the treaty rate and the taxpayer must seek a refund of the excess withholding tax from the foreign revenue authorities."
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