FOREIGN TAX CREDIT (FTC) - TAX WITHHELD AT SOURCE

Foreign tax credits were allowed when foreign tax withheld at source was supported by foreign tax information slips, even though no foreign tax return or assessment was provided.

A July 9, 2026 Tax Court of Canada case (Stern vs. HMK, 2025-3683(1T)I) reviewed whether the taxpayer could claim foreign tax credits of $4,042, $4,500 and $4,827 for the 2022, 2023 and 2024 tax years, respectively, for withholding tax paid to Germany and Switzerland on dividends from German and Swiss corporations held in her investment accounts.

CRA argued that it was not enough for the taxpayer to show that tax was withheld. Rather, she had to demonstrate that she actually paid tax to Germany and Switzerland, which CRA argued required foreign tax assessments. The taxpayer did not have tax assessments because she earned too little income in those countries to justify the cost of preparing the returns.

Taxpayer wins

The court found that CRA's position was contrary to their own policy in Income Tax Folio S5-F2-C1 Foreign Tax Credits (paragraph 1.45), which specifically addressed situations where tax is withheld at source. The Folio states that "[i]f a taxpayer's foreign tax liability is settled by an amount withheld by the payer of the related income (that is, in a way which is analogous to tax under Part XIII of the Act), a copy of the foreign tax information slip is usually satisfactory. In most other cases, a copy of the tax return filed with the foreign government is required together with copies of receipts or documents establishing payment." CRA did not explain why the foreign tax information slips were insufficient and the court noted that there were no concerns about their authenticity or accuracy.

CRA relied on two prior cases (Arsove vs. HMQ, 2016-1418(1T)I; Zhang vs. HMQ, 2005-3867(1T)I) in which tax was initially withheld, but after the taxpayers filed their foreign tax returns they ultimately owed no tax due to access to various tax credits. The court distinguished those cases, noting that they stand for the proposition that a taxpayer cannot claim a foreign tax credit if they did not pay foreign tax and not for the proposition that taxpayers must provide foreign tax assessments in order to claim foreign tax credits.

The court concluded that the taxpayer had paid withholding tax to both Germany and Switzerland and thus was entitled to the foreign tax credit. The court allowed the appeal.

The court also noted that the taxpayer's 2021 appeal was quashed because she did not file a valid objection, a precondition to filing an appeal to the Tax Court.

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