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: https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-2-foreign-tax-credits-deductions/income-tax-folio-s5-f2-c1-foreign-tax-credit.html#N10B86