Partners' Credit for Foreign Withholding Tax: Compliance Issues
Under the CRA's standard policy on crediting the attribution of foreign
taxes paid by a partnership, each partner is considered to have paid a
pro rata amount of the partnership's total withholding tax (Folio
S5-F2-C1, "Foreign Tax Credit," paragraph 1.39). However, the CRA has
stated in a TI (CRA document no. 2014-0558601E5, September 8, 2017) that
this policy does not apply if the taxpayer can show that the foreign
withholding tax paid by the partnership is computed with respect to the
partner's treaty status in the foreign jurisdiction. Although the
details of the calculation in that situation have been described
elsewhere ("Pro Rata Allocation of Foreign Withholding Tax to Partners,"
Canadian Tax Highlights, November 2017), the issue that
remains to be discussed is compliance: how can the partner provide the
TI's requirement of "sufficient, clear, and unambiguous evidence" needed
to support his or her FTC claim?
The TI indicates that the following information should be provided in respect of a disproportionate FTC claim:
These requirements appear to be designed to ensure that the foreign
taxes paid by the partnership were indeed computed by reference to each
partner's treaty status and that the aggregate amount of foreign taxes
considered to have been paid by each partner does not exceed the total
foreign taxes actually paid.
the name of each partner of the partnership;
the Canadian tax identification number, if any, of each partner;
the country of residence of each partner;
the nature and amount of each partner's interest in the partnership;
the calculation and amount of income allocated to each partner; and
the calculation and amount of foreign withholding tax considered to be paid by each partner.
The difficulty for a partner lies in producing this evidence; not every
partner will have access to all of the information listed. The most
likely source of the information is the partnership, since (1) in most
cases much (but not necessarily all) of this information will have been
included in the information returns filed on behalf of the partnership,
and (2) the partnership may have provided this information to the
non-resident payer so that it could comply with its foreign withholding
obligations. Cooperation within the partnership may be required to
ensure consistent filing positions by all partners and supportable
claims for the credit to which each partner is entitled.
The other possibility is that the CRA could take the position that the
partner is responsible only for the information in his or her
possession. Unfortunately, the TI does not make such a statement, even
though the CRA will have most (though perhaps not all) of this
information in the T5013 filings of the partnership. Also, although the
TI is silent on this point, there is a precedent. The CRA was asked at
the 2012 Alberta Tax Roundtable
(question 14) how partnerships could be expected to compute the ACB and
the at-risk amount of partners for the T5013 if partnership interests
are transferred in interactions to which the partnership is not a party.
The CRA replied, "Partnerships and preparers are not responsible for
obtaining and reporting private taxpayer information. CRA expects
partnerships and preparers to be responsible only for information that
is in their possession."
Another problem, besides the compliance issue, is the scope of the
exception. Should it apply if the partnership agreement does not adjust
the partnership's distributions to account for partnership-level tax
liabilities attributable to a particular partner's treaty status
(perhaps because few partners are involved in such special situations)?
The jurisprudence seems to suggest that the CRA's administrative
position set out in the TI may not apply in such situations (see, for
example, the TCC's decision in 4145356 Canada Limited, 2011 TCC 220).
Blake Cassels & Graydon LLP, Vancouver
Blake Cassels & Graydon LLP, Toronto