I had a thing come across my desk, and wanted to make sure to note this trap:

What Happened

Taxpayer held some securities in a TFSA. There was a triggered sale of a specific security, and because of some quirky tax stuff, 15% non-resident tax was withheld on the transaction.

Fast-forward to tax season. The Taxpayer filed a T1 return, and claimed the 15% withholding tax as a Foreign Tax Credit against Canadian taxes owing.

The Trap:

The foreign taxes paid aren’t claimable as a Canadian FTC. Why, well I’m glad you asked:

FTC’s apply when Tax Authorities both claim income as being taxable in their respective Jurisdictions.

In normal-speak, this means that for an FTC claim to work, both Canada and the foreign country have to want to tax the income. But because a TFSA is a non-taxable account in Canada, there is no taxable income as far as Canada is concerned.

The result is that the Taxpayer wound up paying the 15%, with no ability to offset the foreign tax paid against Canadian taxes owing. (The only good news here is that because it’s a TFSA account, there was no double-tax issue.)


Further reading: