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:
  • 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.

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 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).

Eric Brown
Blake Cassels & Graydon LLP, Vancouver
[email protected]

Andrew Spiro
Blake Cassels & Graydon LLP, Toronto
[email protected]


Canadian Tax Focus
Volume 8, Number 2, May 2018
©2018, Canadian Tax Foundation