Provincial foreign tax credit on self-employment income

[Varus50]

Hi There,

I am having a big fight with the CRA regarding my 2007 tax return. First of all, I am a Factual Resident of BC because I do not pay tax on my world income in Australia (on a temporary visa there) and I have residential ties to BC still. I am working in Australia (where I pay full tax on my self-employment income), and tried to file with the CRA as a BC resident using form t2203 to indicate that my income was earned outside of Canada. This would trigger me to pay the federal surtax, which is fine because my foreign tax credits more then cover the entire amount of federal tax owing.

Unfortunately CRA re-assessed my return, basically ignoring form t2203 and making me pay Provincial tax as if I were working in BC. I cannot see anywhere to claim a Provincial foreign tax credit on Business income (on form t2036), so I am stuck in a double taxation situation.

Questions:

1. Should I be using form t2203? Should I dispute the fact they ignored this in the re-assessment?

2. Would I be better off trying to deduct foreign income as tax exempt under Article IV of the tax treaty (deduct on line 256)? Would this even work given I do not pay tax on world income in Australia?

3. What is the best way to get both Provincial and Federal foreign tax credit given self-employment income earned overseas?

Thanks so much for your help!

[nelsona]

Be careful that there is a distinction between non-business income and self-employment income.

Your self employment income is eligible for bothe the fed and prov foreign tax credit.

[Varus50]

Thanks for the response.

When I file my self-employment income as Professional income, it is treated as Business income. Provincial foreign tax credit form T2036 does not support business income, it only supports non-business income which doesn't apply to me.

Given T2036 not support business income, could you please suggest how to get the provincial tax credit (i.e. is there a form to get a Provincial foreign tax credit for Business Income)? I thought the idea was to indicate the business income was earned out of country via form T2203 (which then results in paying the federal surtax instead of Provincial tax). I am happy to pay the surtax because my foreign tax credits more then cover it. If this is not the right way of doing it please advise.

Thanks again

[gabizzle]

Hey Varus50, did you figure this out? I'm having the same problem but on a huge scale. I thought I would be able to use the foreign credit provincially but it seems you can't. Were you able to use T2203 the way you suggested?

[nelsona]

I believe the answer lies in IT-270 from CRA. Any foreign business income tax that cannot be fully used as a federal foreign tax credit, can be taken as a deduction on line 252.
Thisis known as a 20(12) deduction.

[gabizzle]

When looking at 20(12) deductions, it says that it's only for non-business.
My problem is that I am paying US corporate tax of 35%. The US gives me a foreign tax credit note that I can apply to the Canadian Federal taxes, but there is nowhere to apply it to Provincial (Quebec) taxes. So my taxes end up being 35% + 11.4% (Quebec) = 46.4% on the CORP side, which is completely ridiculous. How is that fixed so that my rate ends up being 35% overall?

[nelsona]

I guess you'll need to take this to a pro -- which is a business expense.

[nelsona]

I believe the Varus50's solution is to use T2203 as he suggested. It provides an alternate method of calculating BC tax.

As to gabizzle, T2203 should be used as well, except that QC does not allow you to use 'other" as the location of your business income.

I suspect however that becuase of this, QC does indeed allow foreign business tax as a credit....

[nelsona]

it does.

See TP-772-V.

[gabizzle]

Thanks for that, but look at the first line on TP-772-V

http://www.revenu.gouv.qc.ca/documents/ ... 05-10).pdf

Says the form cannot be completed by a corporation.

[nelsona]

If you have a corporation, aren't you filing a corporate return?

I try to limit my assistance to individuals, like self-employed.

Aren't you paying yourself?

[gabizzle]

My corporation is a limited partner in a US limited partnership. So at the end of the year, my corporation's part of the profits has tax owed to the US at the rate of 35%. That tax is recouperable on the Federal level in Canada with the foreign tax credit I receive from the US but I need to also recouperate the Provincial tax payable on the profits of the corp, otherwise i'm paying a 46% tax rate on the corp side, and then an additional 26+% on dividends paid out, which make my equivalent tax over 70%! So yeah it is something that is personally killing me unless I can recuperate the provincial tax in Quebec under the corp and end up paying 35% on the corp.

[Varus50]

Hi gabizzle,

I remain convinced that t2203 is the way to go for my situation, but have no idea about yours. I am still awaiting reassessment of my 2007 return - it seems to take from 9 to 12 months for them to assess a foreign return which is totally ridiculous. The tactic I used was to call CRA about 10-20 times until I finally found someone who understood my admittedly abnormal residency situation, and he agreed that I should be re-assessed again via t2203. All I can do now is wait for the notice to arrive.

It is troubling that they don't seem to comprehend that I earned all of my self-employment (business) income outside of Canada, and therefore this should NOT be subject to Provincial tax despite me being a resident of BC for tax purposes.

Good luck with your situation, I feel your pain!