US Citizen, PR in Canada, Oil Royalties income from ND,USA -

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drmi
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Joined: Thu Mar 10, 2011 9:54 am

US Citizen, PR in Canada, Oil Royalties income from ND,USA -

Post by drmi » Tue Sep 30, 2014 10:42 pm

Hi Nelsona, this is a followup from spring 2011 posts. W respect to CRA and reporting oil royalties to CRA, several non-eventful years have passed. I file federal and ND state tax and ND withholds a non-refundable oil production tax (severance tax). In Canada I claim the sum of these three taxes as the federal FTC.

I have recently recieved a CRA review of my 2013 return and have been informed by CRA that, "Severance tax is not an eligible tax under the Canada-US tax convention."

Can you help me understand their review? ... what's changed since 2011?

Here is the cut 'n paste from our April 2011 posts
HI again, I want to make sure that the North Dakota state severance tax (11%) that is withheld (this represents the bulk of my state tax liability) is allowable (deductable) in Canada as a foreign tax credit listed on line 405 by performing calculations from T2209 (line 1) and the excess allowable as a provincial foreign tax credit by performing calculations from form T2036 (line 1).

i.e. the form T2209 instructions list IRS federal income tax and state income tax - so that's very clear - is the ND severance tax treated the same?

Thx for your expertise and thank you a bunch for your time

drmi

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nelsona



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Posted: Sun Apr 17, 2011 8:10 am Post subject:

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You get to clim all tax (fed and state) on the federal ftc calculation, and then carry over what's left of it to the prv ftc calcualtion
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drmi



Joined: 10 Mar 2011
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Posted: Tue Apr 19, 2011 4:24 am Post subject:

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Nelsona, thank you for your expertise and your patience w my questions.
drmi

nelsona
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Post by nelsona » Wed Oct 01, 2014 1:24 pm

If CRA says that severance taxes are not income taxes, then you need to take that up with them. They are a tax based solely on income, no?

Nothing has changed, it's jsut that CRA took a closer look at your return.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

nelsona
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Post by nelsona » Wed Oct 01, 2014 1:31 pm

Its up to you if you want to appeal. They could reverse the last 3 years if they decide to.

But if you look at ndtax website, this is really a property tax, rather than an income tax. You should probably be deducting it as an investment expense on your return.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

drmi
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Post by drmi » Thu Oct 02, 2014 12:32 am

Yes, not only the last three yrs but also every year forward. There's a lot to consider, not to mention w my annual income range of $75K-$86K I'm now in a 44% tax bracket - 32.5% + 11.5%. Beyond mentioning the convention their letter did not provide any basis for their judgment.

I think I should at least try to appeal,

the tax convention Article XXIV 4a) essentially says income tax paid to USA in respect of profits, income or gains are deductable. The website says Severance tax is a state tax on oil and gas revenues levied under ND State tax law. It has three components; oil and gas production tax (5% + cu ft) and oil extracton tax (6.5%). ND deducts these taxes every month based entirely on oil and gas income.

Yes, I did see the reference to property tax (in lieu of property tax). I took that to mean ND generates enough revenue through severance tax and does not levy property tax on mineral rights

is it appropriate to request a rational for their decision? ... or, in your opinion, is it best to just present reasoning.

Is there anything else you think I can include to strengthen an appeal?

The letter does not leave room for much ... it's got a pretty formal and final tone to it

nelsona
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Post by nelsona » Thu Oct 02, 2014 12:12 pm

No need to aske their a=rationale, they've told you they don't consider it an income tax.
Strictly speaking it in't, since it is not ties to income, it is tied to value, which is exactly like a property tax.

If they deny the credit, they have to give you the expense, so it is not a total loss.

In fact, your higher tax bracket makes the deduction more valuable! ;o)
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

drmi
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Post by drmi » Fri Oct 03, 2014 1:00 pm

yes, I agree ... a silver lining in every cloud.

Last night I looked back at the 2011 correspondance w CRA; the issue was article XII vs Article VI but the tax in question was servenace tax only. On my T1-adj I was very clear in stating both mineral rights and oil production tax and included the 1099 showing serverance tax deduction. After an eight month process on their end they agreed to both the Article VI classification as well as the severance tax. I'll start w that angle, essentially they approved my use of severance tax as FTC. That approval was sent in writing Jan 2012 and covered tax yr 2009; the first yr I had oil revenue

Thank you

drmi.

bibi123
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Post by bibi123 » Fri Nov 21, 2014 4:46 am

so that's very clear - is the ND severance tax treated the same?

nelsona
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Post by nelsona » Fri Nov 21, 2014 11:02 am

Yes.
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drmi
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Post by drmi » Mon Mar 09, 2015 2:51 am

Hi Nelsona, I hope I've chosen the most appropriate thread. I'm in correspondence w CRA (international). Section 126 (5) of the Act specifies Production Tax. Here's a cut n' paste from the Explanatory Notes,

Foreign Tax Credit – Foreign Oil and Gas Levies
ITA
126(5)
Ordinarily, the only foreign taxes that may be credited against tax under Part I of the Act are income or profits taxes. Subsection 126(5) of the Act, together with several definitions in subsection 126(7), treat certain levies imposed by a foreign government in connection with oil and gas businesses as income or profits taxes paid to that government. The general effect of that subsection is to treat a taxpayer's "production tax amount" as a foreign income or profits tax, subject to a maximum of 40% of the taxpayer's income from the business in question. The 40% rate is an approximation of the Canadian corporate income tax rate, and is based on the fact that foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. As part of a series of amendments reflecting reductions in corporate income tax rates, as well as the elimination as of January 1, 2008 of the surtax that was imposed on corporations, subparagraph 126(5)(a)(i) is amended to adjust the factor for foreign business income.
This amendment applies to taxation years that begin after October 31, 2011.​


Thank you, drmi

nelsona
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Post by nelsona » Mon Mar 09, 2015 5:26 am

So, what does CRA say when you point this out?
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drmi
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Post by drmi » Mon Mar 09, 2015 9:56 am

I have not done that as yet. I've been reading about these taxes - severance, production - and ran across this. I've had two conversations w CRA regarding severance tax, both were friendly but both were quickly reduced to terms of process (both quick to acknowledge they weren't familiar w this type of income).

I did discuss this w ND and they said that severance taxes are divided by portion by the company (the idea essentially - everyone pays their share - which I already knew) I am in lease with. ND said further that the company receives ND tax credit for further development that are not passed on to royalty owners. Severance tax vs tax credits for the company leaves them in a better position.

CRA suggested filing an objection T400A w a support statement and I'm wondering what you think about S126(5), this seems to connect severance tax to income/profit tax ... support my situation

nelsona
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Post by nelsona » Mon Mar 09, 2015 10:36 am

Of course it does. You wre looking for a treaty reason, but when the ITA spells it out even without reliance on treaty, then you should be golden.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

drmi
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Post by drmi » Sun Aug 30, 2015 5:24 pm

Hi Nelsona, so a long long time and nothing heard until now. Needless to say, not what I expected. I submitted an appeal in March and here's what CRA says when I point this out;

1) CRA quotes from IT Folio S5-F2-C1 ' if a particular tax imposed by a foreign country is specifically identified in an elimination of dbl tax article of an IT treaty b/w CA and that country, as a tax for which CA must grant a deduction from CA taxes on profit income or gains which arose out of that country and which gave rise to the foreign tax then foreign tax qualifies"

then concludes, "As ND Sev Taxes (both production & extraction) are not levied on net income or profit arising from the sale of O&G, they do not qualify as FTC under sec 126 of ITA. Further, the treaty does not identify ND Sev Taxes as taxes for which CA must grant a deduction from CDN taxes on profits, income or gains arising in US on which ND Sev Taxes were applied."
I checked and there are 31 states that impose Sev Taxes and the ones I checked all are based on extraction not profit from sales. When I read section 1.13 of S5-F2-C1 it's clear to me - an amount NOT BY NATURE can be deemed as profit or income tax - then uses O&G levies as the example

2) In our appeal I quoted from Dept of Finance - Explanatory notes relating to ITA Part 5 just as I did in my post to you. CRA's reply assumes I am writing it, CRA replies ...
"126(5) requires that the taxpayer have incurred the O&G levies from which carrying on a Foreign O&G business in a taxing country to make claim under that provision. Since there is no exclusive definition of the meaning of 'carrying on a business' CRA refers to Knights of Columbus (2008 TCC 307, American Income Life Insurance (2008 TCC 306), Dudney (97-1386-IT-G) and Gulf Offshore NS (2006 TCC 246)"

Conclusion - 'As there is no indication that other costs or expenses were directly levied against the royalties paid you, I have concluded you were not actively involved in the operation and royalties were a result of passive investment. Therefore, Sev Taxes were not paid on income arising from income eanred from carrying on a business in US (ND), the Sev Taxes do not qualify to be claimed under 126(5) of ITA'

CRA agent is open to a phone call or written reply. Any suggestions you might have are supremely appreciated

nelsona
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Post by nelsona » Mon Aug 31, 2015 8:25 am

I can't say I disagree. they have givine you therir interpretaion of THEIR regs (which is the one that counts) and I don't believe there is anything in the treaty that overrides it.

The key is that the levy is not related to business expenses, thus the section of the ITA doesn't apply.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

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